Methodology

If you are contemplating following our strategy, you should familiarize yourself with the contents of this page. This is necessary to ensure you consider the appropriateness of our advice in light of your own objectives, financial situation, needs and risk tolerance before acting on any of our signals.

First of all, the system and methodology are proprietary. The GLD index started on 11/18/2004, and the first signal was produced on 1/21/2005. The SLV index started on 4/28/2006, and the first signal was produced on 6/29/2006. The system contains back-tested data between the first signal and July 25, 2012. We went live on July 25, 2012.

Nature of our Signals

We provide our financial services solely by generating and publishing ‘market signals’. Specifically, we provide our clients (via our website, email alerts and/or text messages) with ‘Long’ and ‘Short’ signals. A ‘Long’ signal flags when it is beneficial to be long the exchange-traded fund (GLD or SLV) as its trend turns up. A ‘Short’ signal flags when it is time to short-sell the exchange-traded fund as its trend turns down. Our system is always positioned in the market, long or short, and never sits in cash; each new signal closes the prior position and opens the opposite one. Members who would rather not short can instead move to a cash position on a short signal and wait for the next long signal. That choice is always theirs.

Exchange-traded funds (ETFs) are a simple and inexpensive way to gain a diversified stake in top shares on the New York Stock Exchange, thereby minimizing specific risk exposure to any one company. Because they have very liquid markets, they can be bought or sold instantly through any stockbroker, by phone or online. They also have very low annual management expense ratios. For these reasons, they are the preferred class of investment vehicle for market timing.

Our Strategies

Our service uses a combination of a mechanical system and a rules-based system. The indicators we created for the mechanical system are specific algorithm scripts, each having proprietary settings and parameters. The rules-based system has specific criteria that must be met for assigning trading signals for GLD and SLV. We publish market signals with a strategy that generates about 20–25 signals per year.

Other Ways Analysts Derive Their Signals

In general, share-market analysis is either ‘fundamental’ or ‘technical’ in nature.

Fundamental analysis endeavours to predict the overall direction of the market by focusing on the economic outlook, sentiment surveys, individual industry circumstances and political events. Those who monitor ‘fundamentals’ hope to predict the next change in market direction before that change is reflected in share prices.

Technical analysis focuses on the analysis of daily share-price action. There are essentially two forms. One is based on the belief that it is possible to ‘read’ or ‘interpret’ chart formations to predict market direction, embracing pattern-recognition systems based on Fibonacci waves, Dow Theory, Elliott waves, head-and-shoulders patterns, necklines, trendlines, channels, double and triple tops, wedges, triangles and other formations.

By contrast, GoldSilverSystem.com adopts a purely quantitative technical approach that tries neither to predict nor to forecast. Our approach is based on reacting to price action. As such, ours is a combination of ‘trend following’ and ‘momentum’ to identify tradable impulses. Trend followers use what we call ‘reactive technical analysis’: instead of trying to predict the market's direction, this approach reacts to the market's movements as soon as possible after they occur.

Hence, we seek to respond to the market, not anticipate it. Our focus is on identifying any trend/momentum reversal at a relatively early stage and riding the new trend until the weight of evidence shows it has reversed.

“Technical analysis is not concerned with the difficult and subjective tasks of forecasting trends in the economy. Technical analysis tries to identify turning points…” (Martin J. Pring, Technical Analysis Explained, 4th ed., McGraw-Hill, p.8.)

“Trend-following indicators always have you buying and selling late and, in exchange for missing the early opportunities, they greatly reduce your risk by keeping you on the ‘right’ side of the market… Most investors are better at following trends than predicting them.” (Steven B. Achelis, Technical Analysis from A to Z, 2nd ed., McGraw-Hill, pp.33–35.)

We hope to buy at the beginning of an uptrend at a low price, ride the trend, and sell when the trend ends at a high level. The first and most important challenge is to determine when a trend is beginning or ending. A trend is a directional movement of prices that remains in effect long enough to be identified and still be playable.

Trend-following (lagging) indicators don't flag upcoming changes in price; they simply tell you what prices are actually doing (rising or falling) so that you can invest accordingly.

Some Caveats

Our approach is designed to identify the points where a trend is potentially changing character, so we can reverse our position. By definition, we will never catch the exact bottom or the exact top, but we want to be positioned with the new trend as soon as it changes.

Market timers, like all trend followers, earn their profits by capturing the middle of a trend. We never identify the trough or the peak; it's the middle range that matters.

Our Approach

Our mechanical system will produce small losses, sometimes back-to-back. The reason is that the system is trying to get on the right side of the market prior to a large move (either up or down). Once trending with the market (as shown below), the system captures that return, whether the position is long or short. Members who follow each trade will do very well and, overall, better than the buy-and-hold strategy.

The chart below is for graphical purposes only and not the exact method we use. As stated above, we use a combination of a mechanical system and a rules-based system with proprietary indicators and criteria. The green dots mark long positions and the red dots mark short positions. The system is always in one or the other.

We don't try to spot turning points until they happen, so we reverse a few days after a new trend begins, though we are always very close to the turn as generated by our algorithms. When a downtrend gives way to an uptrend we flip from short to long, forgoing the small gain right at the bottom that flows automatically to buy-and-hold adherents.

Equally, when an uptrend gives way to a downtrend we flip from long to short a few days after the market turns. We give back part of the move at the turn, but the new short position is then set up to profit as the decline continues, the same decline that hits buy-and-hold adherents.

Essentially, our approach is about staying on the right side of the trend: capturing the bulk of each up-move while long, and aiming to profit from down-moves while short, rather than riding the market down as buy-and-hold must.

Occasionally the market, rather than continuing the trend, reverses just after we flip position. Such back-and-forth swings are called ‘whipsaws’, and they are the main source of the system's small losses.

Losing signals are part of any timing strategy. The key is avoiding large losses. Our system is designed to always capture the large moves of the market, which generate a larger return than the sum of the losses. Generally, over time, winning signals should more than compensate for any losing signals.

Past performance is not a guarantee of future results. GoldSilverSystem.com is an educational financial publication and not a registered investment advisory service.