The algorithm identifies waves in the stock market to forecast its trajectory. Every day the algorithm analyzes raw data to generate various stocks’ predictabilities and signals. The predictability is the “strength” of the prediction and the signal is the movement direction (increase/decrease). The predictability is the historical correlation between the algorithmic prediction and the actual market movement for each particular asset and the signal is the strength of the current prediction for each asset.
More about the predictability:
Predictability (P) is obtained by calculating the correlation between the current prediction and the actual asset movement for each discrete time period. The algorithm then averages the results of all the prediction points, while giving more weight to recent performance. As the machine keeps learning, the values of P generally increase.
Predictability ranges from negative 1 to positive 1; this metric is an adaptation of the Pearson correlation coefficient.
P=-1 means the actual market moved in the opposite direction than the algorithm predicted.
P=0 means that there is no correlation between the prediction and the actual market movement.
P=1 means that there is perfect correlation between the actual market movement and its predicted movement.
Any value of P above zero indicates a positive predictability, the higher the better. For stocks we monitor and predict the Predictability P ranges generally between P=0.2 and P=0.7.
Reading the Prediction
It is recommended that investors consider both the signal strength and predictability, as a highly predictable stock that barely moves and an unpredictable stock that is projected to move drastically both make unattractive investments. It is important to note that longer-term forecasts (1-month and 3-month) tend to have higher predictabilities as the algorithm can more easily spot long-term trends.
Every day the algorithm generates a heat map demonstrating the overall direction of the market. For example, a bull market would be indicated when green “buy” predictions at the top of the table dominate the red “sell” predictions at the bottom.