My approach to markets using SKI indices

My approach to markets using SKI indices

The way I am using the SKI indices is materially different from Jeff's. My approach is not through the statistics. I have been a creator of many systems based on statistics and have found that a major down side of this approach is that when the market changes direction or there is a new force in the market, that significantly changes the market behavior, it takes too long before it is reflected in averages. Usually, mechanical systems based on pure stats fail in the most critical moment when the best opportunities arise or when the market changes the gear. Simply put they need time to adjust to new conditions. If we take the current bull market in gold as an example, with so many unprecedented events recently, we will probably need 30 years before all what is happening now became a part of the SKI stats. I do not have that time.

I had been looking for years to find a tool that doesn't have this fault and I found it in the SKI concept. I use the word ‘concept’ because I would like to distinguish between a broad abstract idea of the SKI mechanics and the SKI system which, for me, is an implementation of this concept. There is one concept and many possible implementations/trading systems that can use this concept to create a tradable system.

The SKI concept comprises three most important features that you can wish for in a TA indicator:

1)     It is self-adaptable to changes in market volatility. This is because, to produce signals, the price interacts with original price values rather than with average values. The consequence of this is that the SKI indices don't need time to adjust to new market conditions! If the life run low of 2008 was unprecedented, as it was, the next time the price interacts with it in, for example, 92-96 index/echo it will interact with this exact low and its exact amplitude and volatility, not with an average of all life run lows over the last 30 years. For this reason we could assume that any system based on the SKI indices is self-adaptable to market conditions hence very robust and resistant to volatility changes.

2)     It can integrate multiple time frames. SKI concept implements the cyclical nature of markets and humans through 16-20, 35-39, 92-96, 218-222… indices that I call 'echoes'. I don’t like the word index because somehow it doesn’t reflect its most important quality: it is the original price just shifted forward in time. Combining these echoes allows us to construct complex market images with multiple time frames overlaid in one clear picture. I do not know for a better tool to define if the market is in a bull or bear formation.  MACDs, MAV crosses, RSIs… work to some extent but because of their nature (average) are slow and prone to failure in volatile markets.

3)     It eliminates noise while producing a signal. The concept of 5 back prices is a concept of weekly implemented into daily time frame to eliminate the noise. It is brilliant and works very well.

Here is how I work. I deploy SKI and other indices to a desired set of data. I mark traditional support/resistance lines. Then I look for important levels and time periods. An important level is where support resistance line meets SKI echo or two or more SKI echoes converge or a combination of any of these. An important period is where price faces an echo that represents important event from the past (important breakout, top, bottom, trend...). After I have decided where the important levels/periods are I watch BEHAVIOR around them. The third element is the overall sentiment that prevails through media and forums I read. That is it. I do not need 30 years of stats to analyze an unprecedented situation like we had many times since the LR low. The SKI indices are telling me what are the important points and the behavior around them is telling me what TO DO not WHAT IS GOING TO HAPPEN. Mix in a little bit of risk management and there you go.