The goal of this program is to allow a person of reasonable intelligence, and of suitable diligence, who can afford to spend four hours per week of his time to generate absolute returns over a long period which are in excess of what could be achieved by handing his money over to a fund manager, and to be able make money whatever the general direction of the market.

Why invest in the stock market?

Because the rich do. Or at least they did, or have done. Note that in bad times, the rich can always move their money out — fast — when they need to.

How do I win the lottery?

Buy a ticket and then buy another one. Perhaps after a million or so purchases you will have won the jackpot, or perhaps got wise.

The point being made is that playing the markets should not be seen as a lottery — a game of skill and strategy perhaps, where the true winners are identified over the long term, but trading and investing should not be seen as a get-rich-quick scheme. These never work. Even pure gambling does not work this way; when punting on horseracing the professional gambler is usually testing his skill against the bookmaker — the skill here being not predicting which horse wins, but identifying favourable odds.

The answer to the original question is that you cannot win the lottery; it is a pure waste of money. The lottery is a tax on the stupid.

Will I lose all my money ?

Almost certainly not, if you follow our advice. Almost certainly yes, if you ignore every piece of advice we give you.

Paper trade to begin with, and teach yourself discipline. When trading for real, the use of stop-losses is to be recommended, certainly in the early times, and frankly, at any time at all — one of the major ways in which brokerage firms generate large profits is through people being emotionally unwilling to close a poorly performing position, they thus let losses pile up in the forlorn hope of the situation turning around. It seldom does, and then it takes a strong individual to 'take it on the chin' as it were; stop-losses take away the need for excessive moral character.

Having said all this, pointed out all the pitfalls, described the situation, offered good advice, there are still individuals who will be tempted to rush out and do stupid things; for these sad souls we offer the following answer:

How do I get run over by a truck?

Blindfold yourself, walk to your nearest motorway / freeway. Cross it.

On the other hand, please don't do this. Use the Green Cross Code, and please do not sue us; don't you Americans get 'irony?' (Hint: it is a bit like coppery. Metallic.)

What is risk management?

Understanding the nature and magnitude of risk; finding strategies which allow good results more often than not, while guarding against one-off exceptional, but highly destructive events. Risk management is naturally an area of some importance to the business community, and covers all of its aspects. In terms of investing, the phrase is often used in terms of portfolio theory — by distributing your investments across a number of different securities you can effectively insure yourself against negative events.

In theory, one should be able to hedge, i.e., limit risk exposure, to anything at all, but there are big problems here. One of the most worrying situations to be in is where one believes oneself to be insulated against disaster, but not actually being so. In a nutshell, the big problems are with very large, infrequent and unusual, but catastrophic events — exactly the kind of thing you need risk management for. These large events are naturally rare, and so one cannot gather any decent statistical samples on them, without which one is reduced to little better than guesswork. For the situation of the investor, the nightmare scenario would be of general market collapse, during which all stocks decline sharply, in which case having a diversified portfolio will not help you. The underlying reason for such a crash might be widespread consumer fear — ultimately all of the companies quoted on our markets must sell something to someone who wants to buy it. If everyone decides to stop spending then the entire economy will be in trouble — which affects every kind of business.

Why should I take the risk? Isn't this all very risky?

Do not indulge in anything which has a level of risk you feel uncomfortable with; just walk away. Do not trade on the markets, do not use this program. If you are not sure about something, then refuse to do it.

This advice applies in all situations. But consider this, whatever form you keep your assets in has some level of risk attached to it — you cannot get away from this, so the quicker you can accept this and start to manage this risk in a rational manner, all the better. Cash is not safe; nothing is completely safe.

Why don't I just put it in a bank?

Why not, indeed! Banks do not seem to go bust in the west; they are pretty safe here, but in other countries banks are not so solid — in these places you might prefer to keep your money in a hard currency buried in your back garden. Note also that the interest gained on an ordinary savings account would have easily beat the returns of the stock market in recent years.

Why don't I just buy a fund?

The 'genius' of fund managers to pick stocks is severely oversold; in recent times this would have been a very bad idea.

Won't data subscription and brokerage charges kill any profits I make?

Our general advice, the smart thing to do in our eyes, is to go for a highly probable, small profit on a regular basis. Brokerage charges and other costs can easily wipe this out, so you need to shop around. Note that these charges are explicitly included in the trading calculations done in StockWave™, and also that StockWave™ is designed to make use of free data sources wherever possible.

The algorithms used in Stockwave™ — how good are they?

You won't get the range we offer in any other application currently available. Some of our methods are novel.

We believe that in complex, real-world situations, there is no single solution which is guaranteed to work all of the time — it's 'horses for courses' — therefore we take the view that a hybrid approach is best, e.g., human beings have six senses — but why not only one or two? The reason is simply that we need six! As simple as that.

What causes stock prices to behave as they do?

Prices are generated on the markets by an auction process — a price is set, and numbers of buyers and sellers are found; when there are more buyers than sellers, the price will rise until the numbers of buyers and sellers are even, and when there are more sellers than buyers the price will fall. This is the market system — that is all there is to it. But this is only the 'how' of the process, as for the 'why' — no-one really knows, and theories are legion. All we know is that people want to buy because they believe there will be rises in the future, and vice versa — why traders believe what they believe comes down to many factors — reactions to news, reaction to past events, intuition, emotion — it is all there somewhere.

How random are stock prices?

Very, but not, we believe, totally — there may be some residue of predictive information in the timeseries, which can be exploited by the right kind of analysis algorithm. If stock prices are completely random then there is no way they can be predicted — in this case a random walk model is the best you can do.

Derivatives are so complicated!

They can be. So only trade with them once you understand them. Stick to vanilla options; absolutely avoid anything you are unsure of. Let's be very clear about this — 'not sure' means 'don't trade.' Use the trade creator to experiment with the trades and their combinations — in your early days with StockWave™ you should think of it as being an educational tool only.

Aren't derivatives very risky?

Yes, if you do not understand what you are doing, and most certainly, yes, yes if you are yourself a bit of a gambler — a natural risk taker.

Derivatives — being very flexible — allow the user the means to both hedge and to leverage a position; hedging is insuring against risk, while leverage means effectively taking on a multiplied risk in the hope of achieving multiplied profits.

Haven't derivatives been responsible for the most recent financial disasters?

Yes, in the sense that derivatives can create a dangerously magnified outcome — but in the final analysis, most disasters are really caused by good old-fashioned fraud and false accounting — the element unique brought by derivatives trading is that of leverage.

What's your advice?

StockWave™ and its creators do not give specific investment advice — we recommend no securities, products or experts; we provide an algorithmic toolkit for data analysis, that is all. We do have some general rules-of-thumb regarding trading though:

Never risk a loss you cannot afford; if you want to play the markets, please don't use the kids' college fund as your 'float.' An investment portfolio should be balanced; some gold, some cash, some foreign currency, property, bonds, shares and perhaps some derivatives — the exact percentage allocations to each category should reflect your own appetite for risk; if you are already wealthy, then you need to play a defensive game, and if you are poor, then the whole discussion is irrelevant. For the rest of us, it is a matter of personal taste.

Don't get emotional. A trading floor is probably the worst place to be; herd behaviour takes over. Reason is a major casualty. More specifically...

Don't panic, and...

Don't get greedy.

Use stop-losses, and also...

'Stop-profits' — close out positions in a timely manner.

'Trading on margin' is usually a bad idea. And by 'usually' we mean, say, 9,999 times out of 10,000.

Accept that sometimes you will lose money.

Accept that predicting very short-term phenomena is impossible.

Accept that sometimes even the best analysis will be wrong.

Only trust corroborated quantitative analysis.

Learn how to hedge, i.e., using combinations of trades put a floor on possible losses.

Check your alarms and any open positions regularly.

Once a week spend 3-4 hours doing more in-depth research.

If it's 'not for you' — then that is OK; if you find the returns don't justify the risk or stress level, quit.

I am getting weird results — what's happening?!

Maybe you are doing weird things. Maybe it's just the algorithms. Maybe it's a bug. Read the manual. Read these FAQs. Read the release notes. Then, tell us all about it — but be very precise. If it is very worrying to you, suspend trading.

One particular thing to watch out for is having crappy data — if there is not enough of it, or the sampling is extremely irregular, or you are trying to use a high-resolution sampler on low-resolution data — you are likely to get rubbish. The data analysis algorithms work best on high resolution, regularly sampled data of which there is enough to generate a good training set. The internal data pre-processing algorithms can account for a certain of irregularity, but there are limits. The old principle of garbage in, garbage out is applicable here.

The algorithms are too slow!

We have strived to find the most efficient implementations possible for our algorithms, but still — they can be very costly. There is nothing much that can be done about this — see the entry on computational complexity. One thing you must become aware of are 'sensible' parameter ranges for the data analysis algorithms.

Start with low values of parameters, then increase these until the results become acceptable — do not try to start your analysis with everything fully ramped-up. The basic situation is that Monte Carlo simulations and neural network training can take a very long time; in doing your analysis, start out with the faster methods, or low parameter values. Hefty computations can also be done overnight, outwith trading hours; during trading hours we will mostly be concerned with data capture, but even then we can use the lighter methods for real-time refinements.

StockWave™ can use all the processing power you can throw at it — get the fastest processor machine, with the most memory you can afford, and try to get broadband Internet connection; the more powerful your system, the greater is your trading potential.

What is (a)...

Computational complexity — a branch of computer science which studies how well computers can be used to solve different kinds of problem. The basic, and rather unsettling, result is that many, or indeed most common types of problem one might be interested in, cannot in fact be solved 'efficiently' by computers. An understanding of the complexity is often crucial in solving difficult computational problems; naïvely one might think it is possible to just solve a problem any old way you can, then find a computer big enough to solve it quickly — but this is the wrong way to go about things; there are many problem solutions which when implemented using inefficient algorithms will exhaust even the largest computer.

Neural networks are computational systems which are good at pattern recognition, even when using imprecise or noisy data. Applications might be facial recognition, speech analysis, or almost any signal processing task. Neural networks come in many varieties and with many different architectures and training algorithms, the main problem for the end user is in choosing something appropriate; a good, that is to say very hard research problem might be to find the best architecture for any given problem (one approach has been to use genetic algorithms for this structural optimisation).

A web agent is a program which traverses the Internet, looking for certain kinds of target information. Search engines are the largest users of them — their robots wander the Web to generate a catalogue of sites. If you have your own robot then you can tailor it to your own precise needs; this allows the so-called 'deep searching' of the Internet. Very useful.

The Fourier transform is a signal processing algorithm; useful for filtering data and finding periodicities (repeating behaviour). Probably the most important algorithm ever discovered (the FFT is described in the notebooks of the famous mathematician CF Gauss); for example, it makes real-time image processing possible; used everywhere.

A wavelet transform is similar to a Fourier transform, but can have superior qualities. Used for compression, de-noising and many other things. There are actually several types of wavelet transform, and many types of wavelets. In practice, not all wavelets are good at all tasks, but — and this seems to be their main selling point — it is relatively easy to find some wavelet and transform which will do a good job on whatever data you happen to be interested in. We don't know why...

A fractal is a limitlessly self-similar geometric shape; commonly used to model natural forms, shapes and textures, the key feature is that of repetition at ever smaller scales — this seems to be a quality of stock price data as we zoom in and out in resolution (try this with the stock chart). Some commentators have proposed fractals as an analysis technique for stock market data, but have yet to produce any convincing models. The fractal idea is one which you will come across frequently on Web sites devoted to stock market analysis — the reason for this is that most examples of fractals (which are 'of infinite complexity') are in fact generated by very simple formulae (e.g., the Mandelbrot Set comes from the equation x^2 = x), the idea then occurs to the observer that maybe, just maybe, the apparently noisy, random lurching of share prices is, in fact, generated by a really simple formula. All we have to do then is to find this 'really simple formula,' and we have perfect knowledge of the future for our share price — with this information we can then proceed to billionaire status in no time at all.

Natural language parsing — an AI discipline concerned with teaching computers to understand speech and language. The ultimate goal here would be computers we could simply talk to. Has been worked on since the 1950s but success has been much harder to come by than anticipated. It should be pointed out that while the problem of human-like understanding is incredibly difficult — imagine trying to get a computer to understand a joke — many of the techniques developed within the discipline can be applied very successfully to simpler tasks, e.g., filtering and extraction of interesting and relevant news articles.

A search engine — looks for information on the Web; typical usage — type in some keywords, then get back a list of relevant pages. Search engines vary in the quality of information they return to the user, and even the best of them have only probably indexed a small portion of the fully available Internet.

An expert system is a reasoning system based upon rules and logic.

Fuzzy logic — an alternative logic to the usual first order predicate logic; useful as it allows the use of imprecise, linguistic notions. First order predicate logic is in practice, a bit of straitjacket; it lacks expressivity. For a good comic example of the inappropriateness of logic in real world situations, read 'Mr. Logic' in Viz comic.

A genetic algorithm — a general purpose search technique. If you are really stuck, i.e., you have no idea what the search space is like other than it is very large, and no handle on the nature of the fitness landscape — try a genetic algorithm. (Conversely, if you have a lot of prior information, chances are something else will be a lot faster.) Genetic algorithms have had a lot of success with scheduling problems, traditionally a difficult area. The potential application to stock market trading would be this — suppose I wanted to develop a strategy which told me how to trade stocks, which would be a function of a number of observables about a company, including its share price, earnings figures, and perhaps many other numbers — where would I begin? The complication of the possibilities here is unlimited, but if I want to narrow my options, all I would likely succeed in doing is to reproduce a lot of the 'folk wisdom' of trading — which is what I want to get away from. With a genetic algorithm you would not have to start out with strategies that were any good, or were expected to be, but with successive evolution, involving back-testing on the historical data, the qualities of good strategies would gradually emerge and become concentrated.

All of these are 'good things;' all have their place; none, purely on its own, is a magic bullet. It is a common, somewhat unfortunate reality that all new techniques tend to generate a lot of ridiculous hype when they first appear, and then when they fail to 'deliver' are forgotten about. Methods fail because they are used in the wrong situations.

All of the above techniques have been used in StockWave™, at various places and in some measure, wherever considered appropriate.

Do you have a motto?

Yes. 'Reality bites.'

Why don't you have 'my favourite indicator?'

It was an express goal to eliminate anything which did not do anything useful; most of the favoured technical indicators fall into this category.

If you want my favourite indicator, buy another application. Sorry, but we don't do X, where X is moving averages, stochastic, RSI, Fibonacci retracements, GANN, parabolic SAR, MACD, Bollinger Bands, candlestick charts...and any number of other things. We give everything you need and nothing you do not. The intent is to be complete but minimal.

I am a fan of Elliott wave...

We are not — this is merely low-grade pseudoscience one step removed from astrology or the I Ching. There are no judgements too negative for this so-called theory. Please, do yourself a favour and forget about it.

But aren't Fibonacci numbers a fundamental law of nature?

Not any more than the Adidas logo is a 'universal component of human culture.' Quantum theory is a fundamental law of nature.

Is the stock market is based on quantum theory?!

Er, no. At least not directly. The 'laws' affecting the stock market are a branch of the discipline known as complexity. Physicists have recently become interested in such phenomena; convincing simulations have been produced which generate accurately the qualitative features of the markets; unfortunately, these are not capable of telling us if, say, Stock XYZ will hit $20 before Thursday. Or if they can — no-one is admitting it.

Why don't you search for the classic chartist patterns, e.g., double well, head and shoulders, crossing over MACD...

This is anecdotal folklore. If you like it, fine, but best buy something else.

There's this guy who swears that...

What? He saw Elvis? Aliens abducted his donkey? If he is barefoot without his shirt, you have an answer, and if he is sharp-suited with an expensive smile and wants to present an 'investment opportunity' — then it is high time you started to run in the opposite direction.

Sarcasm aside, there are loads of programs out there which do this sort-of 'chartist folklore' thing — if this is your cup of tea, then good luck to you; we think you will need exactly that.

Can you predict the market?

No. No-one can. Not Alan Greenspan, George Soros, Gordon Brown, Gordon Gekko, Uri Geller, Madame Blavatsky...no-one.

But what about Warren Buffett?

The legendary investor takes a very conservative line, which has proved to be most successful in the long term.

So why I am buying this?

We offer an algorithm set which produces probabilistic indications as to likely market movements. This lets you play the odds more effectively than otherwise. In the long term you can win out. It will give you an edge, no more. But if you use it well, that is all you will need.

Can the market makers predict the market?

No. They make their money on the spread — i.e., the difference between the buying and selling prices.

Investing versus speculation versus betting — what is the difference?

None. None whatsoever. They are all the same. Investing is respectable, speculation is not, and betting is seen as either disreputable, or in some backward nations, is even illegal.

They are all about making money. Wanting to make money in the short terms is seen as 'bad,' wanting to make it in the long term, for your pension, or for your grandchildren, is good. Cannot see the difference myself. All investing is really about the joy of the unearned dollar — you buy something at a certain price, then you do nothing whatsoever, and at a later time, that something is worth more than you paid for it. Earning without sweating — very sweet indeed!

What is snake oil?

Snake oil salesmen used to traverse the old American west selling gullible individuals 'medicines' which would cure all ailments known to man. These rarely did any good, and often did a great deal of harm. Eventually they were driven out; many went on to become investment gurus.

No such thing as a sure thing, and no-one will make money for you.

You can only make money for yourself, and only do so by playing the odds — when they are in your favour (and how do you calculate this?) We supply the tools to give the ordinary individual the chance to make good returns with DIY investing. We supply the hammer, the nails and the timber, you must make the shed yourself.

Why are the Rich, rich?

Because they invest in the stock market.

OK, so some of them stole it, and some earned it, and some inherited it, in the beginning, but their continuing and increasing wealth is largely to do with the stock markets. Money makes money, and with the right kind of investing strategy you can make a lot more.

What about crashes?

These do happen but so far, at least, the markets have always recovered - although this can take a period of years to occur.

You might like to think that because the markets have always recovered in the past, then they always will recover in the future, but this is a dangerous assumption to make.

Do markets always 'revert to the mean?'

The answer to this is a resounding 'don't know,' and we have to say, 'don't care' either. But we can say this for sure — if the answer is yes, then it must be yes...eventually. But what do you mean by eventually? How long is 'eventually?' Twelve years? Thirty years? Can you wait that long? This is a dangerous assumption to make. It is reckoned the collapse of LTCM was caused at least in part by this assumption.

The idea behind 'mean reversion' is that there is an 'elastic band' between the share price and some underlying trend — when the price rises or drops too sharply then the price is due to get 'snapped back' — but like many intuitively reasonable ideas it fails to give us any actually useful information, like for example, the timing and strengths of these corrections. If you were serious about building a model then you have to describe the parameters of this 'elastic,' like how stiff it is; so now we have to make a model of this stiffness, probably regarding it as a function of a number of other variables...which takes you back to where you started.

What is volatility?

How much the stock price wiggles around.

Is this good or bad?

Bad in the sense it make the price less predictable, but good in the sense it provides more opportunities to trade.

What about pensions?

Would I be better off using share trading as my pension fund?

Not really. Inadvisable. Pension fund managers do not know any more about the markets than you do, BUT, the government gives tax relief on pensions, and it is this that makes them a reasonably good deal, if you have a company pension based on final earnings. Keep a hold of that whatever you do. Alas, these are becoming rarer by the hour.

Without going too deeply into it, pensions have been one of the worst and yet most respectable scams ever perpetrated by the gurus of the financial services industry against the ordinary man. Rotten value in the past; likely to be rotten value in the future, the underlying and pressing question of exactly how we should save for our retirement is not in any way resolved. Chances are that the whole concept of retirement itself could be lost; first the retirement age will be increased, then gotten rid of entirely. In the future, we shall all work till we drop.

Is there a theory of price formation?

The share price represents the worth of the company. What could this depend on?

How much they sell
How much profit they make
How well their rivals do
The price of raw materials
Efficiency of their processes
Quality of workers
The weather (if you make orange juice)
Expected future demand for product
Are the management competent?

These are all tangible, concrete things; fundamentals, if you will. The trouble is that when one goes to look at a graph of practically any stock, you will see that it oscillates rather wildly and can increase and decrease by large amounts over even short periods.

So what the hell is going on?

The value of a thing depends on how it is traded; things in demand become scarce, the price goes up, and vice versa. The trades are carried out by human beings working in large dealing rooms, who are effected by their, gulp, — emotions and beliefs. This is a somewhat shocking fact for most people to grasp — that tangible real world phenomena can be altered, or indeed generated, by belief and emotion.

It would be nice to think that some set of fundamental physical laws, akin to the laws of physics governed market behaviour — once discovered, all would be known, all understood. But it would seem the markets have a different character. News, rumour, supposition and emotions are communicated to and fro, herd behaviour takes over, and from the individual actions of many traders large collective movements can take place. To the naked eye, price movements look pretty random, and they mostly are.

Share prices can do anything at all; no-one really knows why.

Can we predict or not? Is there a theory that can be used?

Data analysis algorithms used in science and engineering may allow probabilistic estimates to be made. Play the odds a bit better than the next guy, and you will win out in the long term.

Was Adam Smith or Karl Marx right about the market?

It is a good idea to leave your political ideology at home when making this sort of comparison; consider these great thinkers (yes, both of them) as being first class students of capitalism and the forces which shape our world, and remember that as far as we are concerned, practicalities are all that matter.

Both thinkers made insights; in a nutshell, for Smith that markets work best if left alone by governments, and trade is free; and for Marx that markets are unstable and will tend to crash by their own nature; however, both of these positions are extreme idealizations (i.e., simplified theoretical models), in practice governments and bankers are constantly attempting to stabilize the markets; trade is reasonably 'free,' and while there have been crashes, the system has never broken down completely.

Market behaviour is very rich and very complex; holding on to theoretical dogma is unlikely to allow you any profit.

Money is more important than politics.

What is Probability?

Probability is the mathematical discipline which deals with chance, i.e., events and processes which have some random component, and which we can no longer describe in terms of definite states.

Probability theory and statistics is often seen as a rather dull subject with everything 'interesting' about it having been worked out long ago, but there are lurking some philosophically difficult problems. What most people, even frequent users of statistics, do not realize is that probability theory as we know it today is based on a particular experimental scientific model — the ramifications of this result in what is known as frequentist statistics. The basic idea is that to define / calculate a probability one has to make lots of identical observations of the phenomena one is trying to describe — which is fine for a scientist in a laboratory.

Frequentist probability kicks in when large numbers of repetitive events are possible, via the law of large numbers. This means that for example, if you watch a toss of coins ten times, and it comes up heads seven times, then it is not inconsistent with the coin being weighted — there is not enough data to make the result statistically significant. If however, we threw the coin ten thousand times, and got 7,000 heads — it is fair to say the coin is almost certainly weighted. It is possible that such a result could happen by chance, but the chances are astronomically low (calculate these). But when you do not have enough data, frequentist statistics gives you nothing.

What is fine in the laboratory, is not so in the real world. If you had been playing roulette and the red came up seven out of ten, naïvely one feels that the 'probability' of the next ball being red should be higher than it being black — it is 'common sense' surely? But this is subjective, and for our trading purposes we would like some hard numbers, not some mere intuition.

This is where Bayesian statistics comes in — this allows estimates of state to be made based upon new information, so in the roulette case, the 'probability' of red would be increasing after each throw. There is an equation for calculating this, so mathematically it is sound. The objection to Bayesianism lies in the definition of a priori probabilities — i.e., the 'probabilities' which we assign to the process, without having any evidence to begin with, which just seems like a purely subjective guess. In the case of the roulette wheel, there is no real problem — punters can bet either red or black, and there is no advantage to the management doctoring the table towards either, so assuming a fair 50:50 split for red and black would be a reasonable. In other cases, particularly where a lot is at stake, it is not so clear — for example Bayesian statistics has made an appearance in the law courts, to somewhat mixed and confusing results.

Going back to the roulette wheel example, had the wheel thrown up another 9 out of 10 reds to make 16 of the last 20, you could be damn sure the management would have stopped play on the table! And quickly. This is really the heart of the matter — the difference in these viewpoints of probability lies in the intended usage; with Bayesian ideas we are usually trying to answer the question, 'What do I do, right now?' having been given an incomplete set of data; there is some kind of time pressure on us to make a decision, whereas with classical probability we are repeating a tightly controlled experiment over and over again until we can make a valid inference. Bayesian statistics is about the 'real world,' i.e., an uncontrolled, rapidly changing environment.

In general, be very careful of mathematical models which use probability theory to study the stock markets — these are often carefully constructed, using quite crude assumptions, so as to provide solvable models, to which the mathematician can provide a neat, elegant solution, and generally make himself look like a genius. Complicated equations can look very impressive to the layman, especially if there are a great many terms full of Greek letters and symbols — but do not be taken in, very often they express rather less about the problem than you might think. Most people think that once you have an equation it can automatically be solved, but this is very much the exceptional case — most of the equations which we do believe accurately model the realities of the world are almost impossible to solve, even with the most powerful computers. The mathematician's principal concern here is to get a paper written and published in a half-respectable journal; repeat this often enough, and he gets tenure. That's it. To be publishable, a paper has to say something definite — i.e., it is to one's advantage to fully explore and solve a gross simplification, rather than merely scratch the surface of the real problem. Be particularly skeptical from anything which originates from a 'Nobel Prize-winning economist' — remember that the poster-boys of the economics / financial mathematics community, Black and Scholes, almost destroyed capitalism itself when their hedge fund, Long Term Capital Management imploded.

Bookmakers would seem to be users of probability, but they aren't. They can't calculate probabilities any better than the man in the street — what they do it is quote odds in competition with other bookmakers, in order to attract customers. Bookmakers will lay odds at whatever level they feel confident of making a profit. You can of course take the bookies odds and turn them into probabilities, for example evens is 50:50 chance, i.e., a probability of 0.5. One of the axioms of probabilities is that the sum of the probabilities for all possible outcomes should be one — i.e., one of the list of all possibilities, must happen. When you take the bookies odds, turn them into probabilities, you will find they do not quite add up to one! (You should be able to work out why this is by now, and how it is related to the market makers in the financial markets.)

What's a butterfly spread?

A new type of low-fat margarine. You don't want to know. And, more importantly, you don't need to know either.

Actually, it is a kind of options trading strategy.

What's a privileged briefing?

A kick in the pants for the small investor. Hopefully a thing of the past.

In the bad old days, the management of top companies would entertain favoured analysts over lunch and golf, often to divulge advantageous information about the company. These analysts would then pass on this information to their best, i.e., biggest clients.

What's a conflict of interest?

When a party has responsibilities which are irreconcilable, e.g., being broker to a company, and yet having to give impartial advice to investors.

What is insider dealing?

The only genuine way to make risk-free profit. The only sure thing there is. And thoroughly illegal. As it should be. A criminal activity, thoroughly chastised by fierce legislation both in the UK and the USA. The laws are so strict in the UK for example, that someone was once nearly prosecuted for it.

Certain events will incontrovertibly affect the share price in a predictable way — this information is known as market-sensitive. Anyone who has this knowledge has an enormous advantage over those that don't. Markets police the release of this kind of information in order to give everyone a 'fair chance' — since if the game was rigged, no-one would play it, no-one would trade shares, and the stock market, merchant banks, brokers, fund managers, etc...would all go out of business.

If ever accused of insider dealing, you can probably get off with it explaining to the constable how lucky you are. Not at all like Charlie Sheen in Wall Street.

How can the little guy make money here? It's all a big stitch-up in favour of the well-connected city boys!

Perhaps. It certainly was in the past, and while experts tell us how things are a 'lot better than they were' — it is easy to feel that this is not the case.

StockWave™ is an attempt to level the playing field for the small investor.

What do you NOT do?

We don't give stock tips.

We don't do analysis for you.

We won't interpret your analysis for you.

We certainly don't recommend any particular brokers — except to say that we favour the cheapest.

We certainly don't recommend any particular analysts — the whole point of StockWave™ is to DO YOUR OWN ANALYSIS.

We don't tell you whether something you are doing is right, wrong, good or bad.

We don't give refunds if you lose money and we don't ask for a cut of your profits either (not like some hedge funds).

We don't say what the 'best method' is. Everything in StockWave™ is useful in some way; if it wasn't — we wouldn't have put it in in the first place.

Now this all sounds rather unhelpful — why ever won't we extend our customers a helping hand?

Simple, if we started doing this, then we would simply become another bunch of pundits / gurus / tipsters — and by now you should realize that this is against our entire philosophy. You want to make money?! Then you have to do it yourself. Do your own analysis. Make your own trades.

Can I make money on a falling market?

Most certainly. For a falling market the classic technique is known as short-selling, or simply shorting — it is a bet that the share price will fall. The thing people find hard to grasp about shorting is that typically one 'sells' a stock you don't own! How can you do that?

In the markets, no-one really cares about actual share certificates — accounts are settled in cash at the end of the day, so as long as you can pay, there is no problem. (It does freak people out a little.)

Here's how it works; you know, or feel very strongly that a stock valued at £20 is going down, and will hit £15. You start 'selling' it at, say £18.50, and indeed it does fall to the level you anticipated. You buy back all the stock you 'sold' for £18.50, when the price hits £15.50 — now you don't owe anyone any shares, plus you made a profit of £3 per share on the deal. Wow!

Of course, it can go against you. Suppose it dropped to £19, then rallied to £22.50. All those people you sold to want their shares, and you don't have them! No worry, just as long as you can pay for the shares you sold; the thing is, now you have to buy a load of shares at £22.50, and so you have lost £4 per share on that deal. Ouch!

On a generally rising (bull) market — one simply buys stock and holds it. It increases in price, you have made money. On a generally falling (bear) market — taking a short position can make you money. And if the market is simply oscillating, one can attempt to buy-the-dips, thus making a profit. Much trickier — analogous to sailing away from or into the wind.

Of course, the easiest way to profit from downward moves is not to buy or rather attempt to short sell stock, but to use for example, options, CFDs or spread bets; these are types of derivatives.

How is StockWave™ different from other programs?

It's better.

And it is cheaper.

What will be the coming hot stocks?

We do not answer questions like that, mostly because we do not know. Even if we did, we probably would not tell you. We have no wish to be considered as gurus.

What will be the coming hot technology?

Please stop asking for tips...

OK, a personal preference; big areas in the next 20 years:

Wearable computers
Immersive gaming
Molecular computing
Genetic medicine
Nanotechnology

Which is really just a statement of the obvious to any technologically literate person. Note that there are many companies with interests in these areas; I have no idea which of them will be winners.

Taking a more nihilistic view of human nature, I would say good long term investments will be the same as they always have been — booze, drugs (of whatever legal status), fags (the kind you smoke, American friends), guns, porn, food (the faster the better). Note that this investing advice dovetails smoothly with the classic deadly sins, which says rather a lot about the human race. Or at least my opinion of it. Seriously though, we cannot see any of these major sectors failing to survive in the foreseeable future.

Technology, when it comes down to it, is simply novelty — which is a very fragile thing.

What is the most important: the chart, news or fundamentals?

The chart shows the price of the stock as it was and as it is now — this is the basic reality we are dealing with, so it is the most important. News is important too, that is to say genuinely unexpected, sizeable events — these will create large distortions in the share price, the effects of which will take some time to realize; the time lag, and the size of movement caused means that serious negative positions can be achieved, so, no...we cannot afford to turn off the news wire. Fundamentals, plus other kinds of information are also important — we know they have an effect, but this is less clear than in the other cases.

All are important and complementary.

What methods do people currently use to trade?

Current trading methodologies broadly separate into three, unusually distinct and mutually exclusive camps. There are the chartists who believe that all truth lies in the chart of the share price; news hounds who listen constantly for the latest event or tip, trying to get ahead of the market, and fundamentalists who believe that the 'real' truth about a company lies in its report, i.e., its sales, turnover, cash flow and who use indicators like the P/E ratio. The intriguing thing to us, as outsiders, is the extent to which these groups separate themselves from each other.

Caricatures of the trading styles?

Chartists are cranky, mad-hatter-ish, pseudoscientists, addicted to a world of strange jargon and arcane 'trading systems.' They will talk of Gann angles, Fibonacci retracements, Elliott waves, the Kondratieff cycle, head and shoulders, double top, triple top, false bottom, support, resistance, momentum, overbought and oversold...please don't listen to any of it.
News hounds are permanently paranoid and overreact constantly on the slightest whiff of any news; never calm, in groups they exhibit the typical herd behaviour of sheep and lemmings. Most common habitat is the trading floor itself, barking into telephones, eyes glued to their clusters of monitors. Equipped with real-time, state-of-the-art data-charting and worldwide news feeds, they carry with them the fatal flaw that they cannot reliably assess the importance of the information that they are receiving; under constant pressure to react instantly, to be seen to be doing something, they do so excessively.
Fundamentalists are the smuggest of the lot, believing that their 'insights' from relentless porings over company reports and analysts briefings, somehow represent the 'true' value of a share price; hardly ever right about anything, they have taken a great blow recently as it has been revealed that their sacred numbers have largely been accountancy fantasies all along; we believe that the worth of company is exactly what its share price says it is, at that moment in time, and nothing more or less; what it is 'really' worth is a fantasy, as is 'should be worth' and 'could be worth.' We also believe that the numbers to be found in company reports give only a very partial picture of a company's financial health, even when they are not simple lies.

Let's think different; why not use all the information available to you, then combine it into a single piece of analysis? Become a fusionist!

In some of the documents you talk of Underlying Process — what do you mean?

Some unknown, and possibly unknowable, algorithmic procedure which generates the price movements.

In physics and engineering, there have arisen some extremely powerful techniques for processing data; take as prime example, the Fourier transform. Why does this work so well? The reason is because almost all physical systems consist of subsystems which oscillate in some manner (the underlying process); this applies equally well to the theory of sound waves, electromagnetic waves in space, and even atoms in a crystal. Whenever you have such a situation the FFT is a natural choice to use as a filter.

The analogous sub-entity with regard to the stock market is the individual trader/investor trading on the market; alas he will tend to be considerably more complicated than a simple oscillator, his actions being largely driven by pure emotion — cycles of greed and fear, plus reactions to random external events.

What are, in your opinion, the most common foolish attitudes?

The chart does not matter — we beg to differ
It is all in the chart — mostly, yes, but by no means all
Fundamentals are all that matters — just keep reading that report!
News does not matter — until something big happens!
All the analysts say — what do you care? If they said anything different they'd probably get the sack.
I got a great tip the other day — who told you and why did they tell you?
Stick to your system at all costs — so you forgo the possibility of learning!
The professional fund manager know best — unless you check his record!

If you rely exclusively on one type of data source upon which to base your analysis, eventually you will take a very bad loss.

General data analysis — a summary

How to use news

Get the news; develop an awareness of it. See where the events occurred in relation to the graph. Look for correspondences.
Filter the news for relevance.
Decide whether it is generally good or bad.
Make precise quantitative assessment of size, quality and favourability.
Aggregate news events, together with other information via an expert system.

How to Use the chart

Look at the chart; look for news events around large moves. Apply the StockWave™ analyzers to generate probabilistic estimates.

How to Use Fundamentals

Inspect aspects of interest.
Use the query tool to generate tentative stock picks. You supply the criteria of what you consider to be good or bad qualities and the database finds these kinds of stock for you.
Use the mining tools to look for signals of good and bad company performance. Use these signals to filter out stock picks. This is analysis of a different level from the simple query — instead of providing the question to be answered, the database analyses itself for internal patterns, then returns these stocks to you.
Do all from with a visual interface; see clusters of companies; see relationships; see relative performance.

Putting it all together

Data fusion is the key technology we must use:

Fusion of predictors
Fusion of price series analyzers and news events
Fusion of news and fundamentals
Fusion of everything

'Everything matters to some degree, at some time' is an unattractive reality to face. We want life to be simple; simple rules, clarity, folk-wisdom, home truths...the endearing, heart-warming emotional crutches that we cling to... wake up folks. The world is complicated, confusing, full of doubt, irrationality and randomness. Look at how the markets lurch around; look at an individual share price, see the chart of its graph; is that anything like the smooth functions and simple curves you drew in algebra class?

Now ask yourself this question: would you like to make real money to spend in the real word on real things, or would you prefer to make idealized money in an idealized model of the financial markets? Anything can happen, and it will — if we wait long enough. 'That shouldn't have happened' has no meaning; there is only what is, what was and a set of possible futures, each with its probability of occurrence.

Why is news important — can't I just use the chart?

Truly unexpected things can catch you out. By your persistent questioning I assume that you have heard of, and are thinking about the Efficient Market Hypothesis. Well, this hypothesis is exactly that — a hypothesis, an idea, a guess, a working assumption made by academics so that they can solve their equations more easily.

Empirical evidence suggests that the market is 'quite' efficient, but not totally. We do not believe that 'quite' is quite good enough to start basing trading decisions on. Consider this, if you lose money on a trade, do you feel happy that you 'nearly' made a profit?

No, we didn't think so.