Algorithmic Trading With

Introduction Packet

Contents

About I Know First

How To Read The Prediction

• Signal

• Predictability Indicator

Sample Top 10 Algorithmic Forecast & Corresponding Returns

Example Analysis of Tesla (TSLA) By An I Know First Research Analyst

How To Recognize Overall Market Trends

Algorithmic Trading Strategies

About I Know First

I Know First is a financial services start-up that utilizes an advanced self-

learning algorithm to analyze, model and predict the stock market. Co-Founder

Dr. Lipa Roitman, a scientist with over 20 years of experience created the market

prediction system. The algorithm is based on artificial intelligence, machine

learning and incorporates elements of artificial neural networks as well as

genetic algorithms to model and predict the flow of money between 1,400

markets from 3-days to a year: stocks, ETF's, world indices, gold, currencies,

interest rates, and commodities.

It separates the predictable part from stochastic (random) noise and then

creates a model that projects the future trajectory of the given market in the

multi-dimensional space of other markets. The algorithm outputs a predicted

trend as a number, which in turn, is used by traders to identify when to enter

and exit the market. While forecasts can be used for intra-day trading, the

predictability tends to become stronger over longer time-horizons such as the

1-month, 3-month and 1-year forecasts.

How To Read a Prediction

In each algorithmic forecast, there is the signal and the predictability

indicator. The signal is the number in the middle of the box (flush right). The

predictability is the number at the bottom of the box. At the top, a specific

asset is identified. This format is consistent whether you are receiving the Top 10

Stock Predictions + S&P Forecast or the Top 10 Commodities Forecast or any

other I Know First prediction for that matter.

This algorithmic forecast for Tesla was made on May 12th 2014. Within the

predicted time horizon (time frame), TSLA shares gained 4.59% in accordance

with the algorithmic forecast. Before making any trading decisions, consult the

latest forecast as the algorithm constantly updates predictions daily. While the

algorithm can be used for intra-day trading the predictability tends to become

stronger with forecasts over longer time-horizons such as the 1-month, 3-month

and 1-year forecasts.

Signal: This indicator represents the predicted movement direction/trend; not a

percentage or specific target price. The signal strength indicates how much the

current price deviates from what the system considers an equilibrium or "fair"

price.

Analogy with a spring: The signal strength is how much the spring is stretched

The higher the tension the more it will move when the spring is released.

The signal strength is the absolute value of the current prediction of the system.

The signal can have a positive (predicted increase), or negative (predicted

decline) indication. The heat map is arranged according to the signal strength

with strongest up signals at the top, while down signals are at the bottom. The

table colors are indicative of the signal. Green corresponds to the positive signal

and red indicates a negative signal. A deeper color means a stronger signal and

a lighter color equals a weaker signal.

Predictability: This measures the importance of the signal. The predictability is

the historical correlation between the prediction and the actual market

movement for that particular market. For each asset this indicator is recalculated

daily. Theoretically the predictability ranges from minus one to plus one. The

higher this number is the more predictable the particular asset is. If you compare

predictability for different time ranges, you'll find that the longer time ranges

have higher predictability. This means that longer-range signals are more

important and tend to be more accurate.

* Stocks with the strongest signal and largest predictability are preferable.

Signal and Predictability are independent indicators. While the signal

gives the direction and the relative "scale" of the predicted move, the

predictability indicator is related to the probability of that prediction to realize,

which is based on the past performance of the corresponding predictor. Both of

the parameters are important. The higher both are the better. It is

recommended to consider both the signal strength and predictability.

Sample Top 10 Algorithmic Forecast & Corresponding Returns

Below is a typical Top 10 Stocks Picks & S&P 500 Forecast in the 1-year

time horizon with the correlating returns in a table to the right. A “✓”denotes a

correct prediction while an “x” conveys that the stock did not move in the

forecasted direction.

There are multiple strategies that can be utilized with algorithmic

forecasts that will help mitigate risk and enhance returns. All of which are

recommended to be coupled with traditional forms of analysis. Forecasts can be

customized to fit certain criteria such as being large cap, have a dividend, low

volatility or a specific industry that best suits any investment strategy required.

Example Analysis of Tesla (TSLA) By An I Know First Research Analyst

First and foremost, for any trading decisions use the most recent forecast.

In general, the longer time range forecasts are more predictable than the

shorter ones and they should be used to identify the main market trends. We

recommend that for the first month of your subscription that you watch the

system, learn it and become familiar with it before actually making trading

decisions on accord with the daily forecasts.

The first appearance of a stock in the top list does not mean you should

buy it at any price that same day. Instead, put it in a watch list, unless you are

getting it at a significant discount. We advise that you wait three to five days to

get it at the better price. Try to get into the market at a discount of at least three

percent when the market goes against the prediction intraday or in the next few

days after the first appearance of the signal. Look for trends such as an

increasing signal or

predictability to gain more

confidence in the prediction.

To the left are the 1-month

and 3-month forecasts of

Tesla from May 7th – May 9th

2014. The algorithm indicates

that shares will increase in

value over these time

horizons. These forecasts

display an increasingly bullish

forecast for Tesla. In the 3-

month time horizon, Tesla has

6.41, 8.32 & 28.55 signals for May 7th, 8th and 9th, respectively. As each

forecast is color-coded, the algorithm indicates increased strength of the

predicted movement in this forecast with a deeper green. Deeper greens and

reds indicate more aggressive movement in the stock price and are directly

related to the strength of the signal. However the predictability is not very

strong in either the 1-month or the 3-month time horizon, meaning the

algorithm is not very confident in this forecast. Algorithmic forecasts are

intended to be utilized in conjunction with traditional forms of analysis in order

to reduce risk and optimize returns.

How To Recognize Overall Market Trends

Be sure to recognize the general color of the heat map as well as

consider the forecasts for major indexes like the S&P or Dow Jones to get an

overall picture of the market trend. We advise not to trade against the general

market trend. Another tactic is when you look at specific stocks like Citigroup

(C), is to review the specific industry forecasts such as the KBW Bank Index (BKX)

as well to develop a better analysis. To get a strong indication of market

volatility, the Volatility Index (VIX) forecast is an excellent indicator. If an asset

you purchased is no longer in the Top 5, 10, 20 or 40 you can easily receive a

customized forecast to continue tracking the asset.

While reading your Top Stocks forecast, there are three specific indicators

of how the general market will perform. The first is simply recognizing the

forecast for the S&P 500. The second indicator in your Top Stocks forecast is the

overall color of the entire forecast. When the entire forecast is primarily green,

this should give more faith in the algorithmic predictions as well as express the

general forecasted market environment. The final indicator is the bar across the

top of the forecast, under the date.

When you hover your mouse curser over each cell in this bar, it will show

useful information such as how many assets have bullish signals. In this

example, 37%, 34%, and 23% assets have bullish signals for the 1-month, 3-

month, and 1-year time horizons, respectively. The other boxes give information

such as the average signal, the previous percentage of stocks with a bullish

signal, the average predictability and other useful information that will reveal the

forecasted market environment.

Algorithmic Trading Strategies

Strategy 1: Identify New Opportunities and Double-Check Your Analysis

As you do your own analysis of companies, you can compare your

assessment with that particular assets forecast. On the other hand, you can do

the exact opposite by recognizing new market opportunities and then doing

your own analysis of the assets that have strong signals and predictabilities. This

strategy is a great way to check your analysis as well as recognize opportunities

you would have otherwise missed. This is an excellent way to mitigate risk and

optimize returns especially if your own analysis agrees with the forecast. If you

specialize in a particular industry we recommend getting a forecast that identifies

the best and worst companies in that industry such as our Best Tech Stocks

forecast

Strategy 2: Buy All Assets In The Forecast Of Equal Weights

Another popular approach is to purchase all the assets of the forecast in

equal weights. This strategy will help diversify your portfolio, ultimately reducing

risk and augmenting returns. The I Know First Average Return reflects the return

an investor will receive implementing this strategy. While not every

recommended asset will follow the predicted movement, those that do not

usually will not deviate tremendously and investors will benefit from the assets

that do follow the prediction. The I Know First Live Portfolio is a great example of

how this strategy has proven effective. The portfolio is based on the average

return from the Top 10 Stocks + S&P 500 forecast in the 1-month time-horizon

purchased on the first of each month, representing a buy and hold strategy. The

portfolio returned 60.66% in 12 months beating the S&P 500 by over 30% in 2013.

Strategy 3: Buy Only Stocks With A Predictability Of .4 Or Higher

This strategy is straightforward and very dependent on the predictability

indicator. This indicator, which is unique to I Know First: Daily Market Forecast’s

algorithm is the historical correlation between prediction and the actual

movement of that particular asset. In other words, this measurement indicates

how often the algorithm has been correct in the past. Generally a predictability

of .2 and higher is considered very good but a predictability of .4 and higher is

excellent. This strategy is somewhat limited in scope but can be a very reliable

tactic.

Strategy 4: Buy Stocks That Have A Strong Signal In Each Time Horizon

Our fourth strategy is based on recognizing assets to reappear in each

time horizon. When you see the same asset in your forecast appear in the 1-

month, 3-month, and 1-year time horizons, this is good sign. The next step is to

analyze the signal and predictability. You should look for a consistently strong

signal and predictability in each time horizon. Generally you will see the

predictability indicator increase in larger time-horizons, and this is sometimes the

case with the signal as well.

Strategy 5: Multiply the Signal And The Predictability Indicator Together

This approach requires some basic math skills, specifically multiplication.

When you multiply the signal and predictability, you basically create your own

new indicator. This will allow you to easily compare the different assets in your

forecast. The same rule applies, as the larger numbers will denote a stronger

forecast.

Email us with any questions that you may have. We would be happy to help.

Customized forecasts are available, including adding specifics such as large cap

or small cap stocks, additional tickers, different assets including commodities,

currencies, ETFs, world indices or any of the + 1,400 assets.