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How many people saw the financial crisis coming and profited from it?

2007 Christmas party at a dear Friend’s apartment in Azabu, Tokyo. He was the head of MacQuarie securities in Tokyo. Champagne was flowing and i was passably drunk. There was a bunch of Lehman, Morgan Stanley, Citi and other dudes, all smart articulate people.

They were talking about the current uncertainty saying it was an opportunity to buy on dips. I rolled in saying this would be the first time sh!t was about to flow uphill. All those delinquent loans would not end well. The two things that people buy on credit are homes and cars. If home loans turn delinquent, then the rest would follow, contagion. I happened to be tracking Japanese car manufacturers US car sales and watched them plummeting. They laughed at me and concluded that i was a drunken lunatic. Point taken…

1 year down the road, December 2008 same party, half the people. The Lehman dudes were gone or at Nomura. One of the guys ran up to me. I was about to duck and hit the floor as if chased by the police: “no

-“No i don’t do drugs anymore, no i did not do your wife, no i didn’t steal anything, you got the wrong guy” routine. He shook my hand and said:

-“You are the only one who saw it coming and had the courage to speak up. Whatever You say i do. What should i do now?”

-“Really?”, i said. “I don’t remember. I might have been seriously drunk”

-“You were a little more than tipsy, but you were funny and more importantly you were right”, he said

I had correctly predicted the crash, and was too drunk to even remember it. Sounds about right:

-“Hmm, Plausible”, i answered. “Alright, so buy when monetary authorities roll out the big guns”,  i said.

-“OK, but Buy what then?”

-“Come on, do i really look like i know? Seriously? Monetary authorities are panicking. They are about to roll out the mother of all monetary bazookas. So, it does not matter what you buy, everything will rally”

-“Yeah, right. You are drunk again” and he walked away

He did not buy and I should have followed my own advice. I gave back a lot of performance in the 2009 rally. I insisted on shorting cyclical stuff when i should have shorted defensives. I was stubborn. I stopped trying to make predictions shortly thereafter.

Now, the implicit question is probably: are we in the same situation now? I don’t know and frankly, it really does not matter. I looked at my forecasting accuracy stats and concluded i should not be in the forecasting business anymore. Not encouraging for the rest of the industry considering i foresaw the crash and the ensuing recovery.

These are the main lessons:


  1. predict the next crash: you will sell too early. It is as useful as forecasting when you are going to get sick. Only hypochondriacs check themselves in hospitals before they get sick. Don’t listen to those market hypochondriacs telling you the mother of all bear markets is around the corner.
  2. Focus on why: what matters more? Why you got cancer or how to cure it?
  3. Duration and depth: when it happened, sell-side “quants” rolled out average duration tables. On average bear markets last for xx months. If You are sick, what would you think of a doctor who would say You will have 39,8 C fever and you will heal in 3 weeks 2 days, 17 hours?


  1. Recognise when it is there: build a system that tells you now it is time to sell and go short. To identify the top, use my floor ceiling method. It works objectively after the fact. Laurent Bernut’s answer to What is the most precise way to draw support and resistance lines for forex trading?
  2. Recognise when it is gone: Everyone got terminally beared up at the end of the bear market. They all, me included, missed the rally. Those who said they bought in March 2009 are like descendants of the Mayflower: deluded liars. To identify the bottom, use my floor ceiling method. It works objectively after the fact
  3. Have a bear market plan: bear markets are notoriously stressful. Not the brightest idea to devise an emergency exit plan when the building is on fire

Are forex signals useful in making profits?

This question originally appeared on Quora


This great question has done a remarkable job at baiting scam-artists. Whoever answered “Yes”, followed by a link to some website is a scam-artist

The one-eyed scam-artist leading the blind

Everyone wants to gain this mysterious esoteric called trading edge. Well, trading edge is not a story, it is a number and here is its formula:

Gain expectancy = Win% * Avg Win% – Loss% * Avg Loss%

Tattoo it where you can be reminded throughout the day (Tramp stamp on your better-half is probably off limit). There are two modules to any trading strategy:

  1. Signals: exits first, last and very very very least entries
  2. Money management: position sizing

The scam artists who answered yes, referred to hereafter as Yes-men will provide dummy statistics about entries but conveniently forget everything thereafter. Entry is easy. You can buy a boat, a sports car, a vacation home any day of the week. Good luck reselling it. Bad entry can be salvaged, bad exits can’t.

Then comes position sizing. Signals conveniently omit position sizing for a good reason. It is a function of win rate and stop loss, both of which are either omitted or optimistically manufactured…

Implicit adoption of a trading system

Now, who does not like to wake up, receive a bunch of signals, pick one or two, send the trades and watch the money roll in? I certainly would love to, except it does not work like that.

Even if signals are thorough enough to encompass all the necessary elements from entry to exit including risk, it still omits the most important: following someone’s signal is adopting her belief system, formalised in a trading system. Example: as a professional short seller, i am naturally risk-adverse (prudent position sizing) but disciplined (take the trade, follow the system). This philosophical tenet transpires in my algorithms. This may not jive with someone who likes big high conviction bets.

Even supposedly objective systems such as deMark have several subjective degrees of freedom. The best example comes from the Market Wizards series. Those wizards have completely different strategies that sometimes seem to contradict each other. Yet, they are profitable because they have a system that suits their personality. When You follow someone else’s system, remember that you half-heartedly embrace someone else’s personality without fully understanding it.

How to spot a scam artist?

First, those who answered Yes and attached a link are scam artists. Coming out was not so tough after all, was it?

Second, here are classic red flags:

  1. No real money live track record = SCAM: Myfxbook provides live track record, so no excuse
  2. Entries only: no exit, no stop loss, no risk, no stats means SCAM
  3. Rosy stats: 70%+ win rate means SCAM. We all want to follow a system that is right 100% but the reality is the best traders LT average win rate is around is largely below 50%
  4. easy money: no you will not turn $500 into $2,000,000 in 2 years. Veteran pros with decades of experience dream of achieving 20% per annum. Scam artists who promise you can achieve 100% returns= SCAM


Basic rule of thumb: we are in finance, assume everyone is a scam artist until proven wrong. Good news, You can cross a few names off the list

What are some of the best techniques for selecting stocks to short?

What are some of the best techniques for selecting stocks to short? by Laurent Bernut

Answer by Laurent Bernut:

Two parts: let’s start with stuff that does not work and end with stuff that works.

Part 1: stuff that does not work

High short interest:

Short interest and/or borrow utilisation is a function of supply and demand. Supply of stock available for borrow and demand from short sellers. So, when short interest rises, it means two things:

  1. Supply is drying up: institutional long holders liquidate their positions. Remember that whatever information that has led You to conclude something is a short is also available to long holders, who probably conclude it is not worth holding anymore
  2. Demand from short sellers is increasing: unlike going Long, going short is a finite universe. There is a limit to the amount of shares available for borrow. So, You will end up competing with short sellers and stable shareholders, those who never sell

Analysts downgrades:

Analysts are chronically late to the party. It is difficult for them to downgrade their ratings, especially when the whole investment banking food-chain depends on them rating stocks as Buy. Example: Enron was rated Buy days before its collapse.

Bottom line, You don’t need analysts in Bull markets and You don’t want them in bear markets

Fundamental newsflow deterioration:

Many market participants wait for deterioration of fundamentals before putting on a short. Well, if You believe that markets are discounting mechanisms of future events, waiting for the confirmation of those events is by definition late. This is called confirmation bias.

On the short side, it often comes from painful experiences. Market participants often start with anticipation shorts: unsustainable valuations, momentum etc. They get carried out a few times. So, their next move is confirmation short: wait for fundamentals to really suck before putting on a trade. They then compete with other fundamental short sellers.

Vigilante short selling

Tourists short sellers often short stuff that does not make sense anymore. They go after crazy valuation, parabolic momentum etc. They may be right in theory, but they are invariably wrong in practice. One sane person versus an irrational mob is still an unfair fight.

Personally, i have no sympathy for those market participants. They put other people’s money in harm’s way. Their egos breach their fiduciary duty to their clients. Luckily, they don’t hang around for too long

Part II: stuff that works


Between the time a stock should go down because valuations & momentum are unsustainable and the time when a stock should go down because fundamentals are horrible, there is a long period of time when price actually DOES go down. Reality is the time between the “should”

Look for downward relative momentum first, then weave whatever rationale You want.

“Buy” for the long term investor

My favorite of all times is a blind spot of analysts. Within their coverage, there is always a buy rated stock that performs poorly. They call it “Buy for the long-term investor”, meaning short term it will go down and You have to be patient.

So, as a good acid test, thank the analysts for the info and ask them if they would like to be paid long-term commissions for those long-term ideas. If they grimace, then Short

Relative Shorts

Before Valeant (VRX), Wells Fargo, Deutsche Bank, Lehman Brothers, Enron drilled a hole in the earth’s crust in absolute, they underperformed their benchmark for some time.

Relative momentum (Absolute Price / Benchmark price) is by far the surest way to find good shorts. a good Long/Short portfolio is composed of Long book of outperformers and a Short book of underperformers.

Putting everything in relative terms will immediately increase the number of short ideas.

What are some of the best techniques for selecting stocks to short?