Jeff Wrote:[SIZE="1"]I wonder if someone from Dynamic Trend could elaborate a bit on the importance to be placed on the "stars". The website literature specifies that stars should be at least 4.
Since then, I've heard that if the RF is 15, then any star level is ok. Today, I see quite a few trades with stars of 1 or 1.5 and RF of 15. What I see there, looking at some charts, is that the stocks have taken a sharp jump in price recently, with a sharp pullback. In fact, the curve is so steep it almost looks like an exhaustion peak (but is generally too small for that).
So, my question is whether we can really completely ignore the stars, if we see an RF of 15.
Is that the case?
Jeff[/SIZE]
Before I answer the question, let's define the
Recovery Factor and
Star Rating, then review its attributes and purposes for being developed:
The
Recovery Factor (
RF) is a newer mathematical model that predicts the potential recovery speed in a room. A very high RF value typically generates a very fast price recovery. Trades with a very high price Recovery Factor tend to trade quicker to its target. Trades with a low price Recovery Factor may still trade to its price target. However, the recovery rate tends to be a longer time, and usually a great deal of sideways price action is seen during this sluggish recovery phase. An RF takes into consideration the strength and/or weakness of the trading room setup, as well as the strength and/or weakness of higher level rooms. It does not predict a trade with a very high RF (or low RF) has better odds of success-- going to the target and hitting it-- but, rather, it identifies higher potential associated with a previous trend returning in a more efficient and effective manner. Again, a high RF value is not a guarantee a target is going to be hit. It simply suggests if a trend does return, the price action should statistically be more dynamic or quicker in its nature. The Star Rating was not designed to do this, to the best of my knowledge.
The
Star Rating System is a Dynamic Trend proprietary indicator designed with a two-fold purpose. It was designed to primarily determine the strength in a room and the "quality" of a trade setting up in that room. A secondary purpose for the Star Rating was to help traders rank from a large list of trade setup opportunities, which setups have the best "accuracy" or "quality" within the trade qualifying logic. It was a way of helping the trader find a starting point when working out of a large list which stocks.
The Recovery Factor was developed after considering the question, what do you use to measure quality and strength (weakness) in a market where there is no larger market to trade in the direction of. For example, with stocks, we compare that strength to the overall and Nasdaq markets, and we can compare it to the stock group and sector it is related to. This gives us a better indication what the overall market direction is doing, and we can then try to trade in the same direction. However, which futures and Forex contracts, we have different markets and no central clearing house to compare individual strength/weakness with. We need a way of determining what the real strength or weakness potential really is because the we haven't larger market available to compare or contrast this strength/weakness with. Hence, RF addresses this concern.
A Star Rating calculation is based on the current room and does not take into consideration, to the best of my knowledge, the underlying strength or weakness in higher rooms. Star ratings are used to gauge strength and range from one to five with half increments (1, 1.5, 2, 2.5, 3, 3.5, 4, 4.5 and 5). The higher the star number, the greater the strength and quality associated with the trade. Likewise, the lower the star number, the weaker strength and quality associated with the trade. Statistically, the very best trades are 3 stars or higher. 4 and 4.5 trades will give you more trade opportunities but are not as accurate as a 5 star trade. While 4, 4.5, and 5 star trades are preferred, a star rating of 3 or lower can be acceptable under certain conditions. If you are using only the Star Rating to determine a trade to take, using lower Star Rated trades, you would now have to go to a chart and do your own additional technical analysis (TA) to better qualify that trade. This would be the only way to improve your odds of success if you took that trade. If TA is applied, these weaker trade setups can be considered now as you filter through the setup and add more of your own judgement to the equation. Complex technical analysis can be required if you choose to take a trade with a star rating below 3. Using, for example, the Trade Balance as a filter will increase 4 and 4.5 star trades up to six percentage points, so this is why we would tell you to just focus on the higher Stars. It is the easiest, quickest way of determining do you want to take a trade or not without doing any additional analysis.
When taking a trade setup, time is money, and we have limited time to determine what is the best potential trades available. Both the Star Rating and the Recovery Factor (RF) have similar properties or objectives, but when we get back to the logic involved for designing these tools, I think we can pick out slightly different objectives and usefulness under some circumstances. The Star Rating was designed to save time and quickly identify improved quality in a trade setup; the RF was designed as a better way to measure individual rate of change in strength or weakness as it relates to itself on higher rooms. It, too, can help quicken the process of chosing the best trade(s).
The RF is a newer algrithym. Tom has stated a very high RF value at the extreme range of 15 to 14, or -15 to -14, has the same meaning as a 5-Star trade rating. He also said, a high RF superceeds the Star Rating because it is a more sophisticated algrithm. The RF is similar to an exponential curve where at its maximum extreme range it identifies it identifies the very best potential strength (weakness) available. Within that range, any value below that extreme range is somewhat meaningless, meaning the lower RF value doesn't really identify anything quantitatively useful as to helping us know with great confidence how long that pullback or pause pattern will eventually return the previous trend, if it does at all.
So, to now answer your question, let me tell you how I use these tools in my own personal trading: When trading stocks, I will start my searches first looking for a combination of high Star Rated setups, and extreme RF (15 to 14 and -15 to -14) values. I want to first find the best of both. Once those setups have been reviewed-- if I still want to consider other ideas-- I will continue to work down the available Room list and now check out the lower quality setups. I do this because my experience has shown me there can still be diamonds in the rough. I will consider lower Star Ratings that still have excellent RF values. But, as a caveat, I start to get more selective as I work down from a high standard to a lower standard. I place more weight on finding those setups with the maximum possible higher room strength/weakness possible. I look now for higher risk/reward ratios (RRR) and very small loss setups, typically between 70 cents to $1.60. I put more weight on finding the very strongest/weakest trending stocks with extreme Trade Baland and DT Profile strength showing on the higher rooms. I might take smaller positions. If it is a higher room trade setting up, I might actually take some more time going to the chart and adding my own technical analysis observations to the equation. And, finally, if the quality just isn't showing up, the overall market is pausing and there is no day-trade trend going on, I might actually just stand aside and go into a more conservative, patient trading mode where I wait until the overall market comes back to life and I can jump into these lower quality trades. (Again, the comment above is my personal preference methodology. it is how God made my personality, how I think, how I prefer to do things.)
As I experiment with trading a demo account to better understand the Forex, I have been focusing more on finding the 14 to 15/-14 to -15 extreme price Recover Factor values. I, also, try to find a currency that shows a more uniformed, stronger Trade Balance, and currencies in the DT Profile showing very best strength bar strength/weakness in the higher rooms. Star Ratings in Forex and Futures have less importance to me. If a high Star Rating also is available with a Very good RF, am attracted to it.
I think you can technically ignore the Star Ratings when they have really great RF's in the trading room, and when there are great RF's two or more rooms higher. But, as long as it is in the program, why not take advantage of it? For me, I am still having a hard time throwing that baby out, so to speak. I personally still like looking for higher Star Ratings with my stock picks, but at least now I can actually consider lower Star Ratings when in the past I couldn't. The price Recovery Factor (RF) is an excellent newer tool that really now helps me (us) better guage the underlying strength/weakness quality as it relates to higher rooms. This comparison information, I don't think, exists in a Star Rating.
Hope this helps. Thanks for your excellent question.
Sincerly,
[color="Blue"]Marc[/color]
[SIZE="1"](PS- I haven't had enough time today to review what I just wrote and make sure I stated everything in 100% proper english. I will try to re-read this later today and if I can find ways to better communicate, I will edit the text and attempt to improve on this. I just wanted to get you asap the best answer i could type up as quickly as possible)[/SIZE]