The Correction Gauge Trader (CGT) is a PowerStocks developed short-to-medium term ALSH trading system that relies purely on the published daily price of the JSE ALSH index to derive buy and sell signals.

For investors new to the market we always recommend HedgeTrader and Zweig LazyBoy for their forays into trading. These are medium-to long term systems that trade the TOP40 or RESOURCES (RESI) index. They are slow, lazy , boring but SAFE. The CGT adds a bit more activity and spice to the above lazy systems and it is the 3rd system we recommend to PowerStocks newbies wishing to expand their horizons beyond the lazy systems. Once the newbie has mastered these 3 systems with Index Trading, they can move onto individual equities trading with JSW.

This CGT is an innovative gauge that measures how much percent the ALSH index has currently corrected (fallen) from a recent high. The gauge is represented by the thin white line with white dots "% CORRECTION DECLINE" in the chart below. Its current value is shown on top right of chart "CORRECTION NOW" in blue text. This shows you exactly how much the JSE has lost in value in the current correction as of today's date. When the gauge is zero it means the JSE is posting new highs (i.e. we are not in a correction.)



The yellow signal line "EMA OF %DECLINE" is an exponential moving average of the correction gauge, to smooth out the rapid up and down movements. Its value for the day is shown by "EMA VALUE NOW" on top right of chart. It gives us a good feel for the INTENSITY of the correction and allows us to compare the size of the current correction with respect to previous ones in terms of size of the fall in % points.



There are three TROUGH DETECTION thresholds depicted by horizontal glowing lines, coloured orange for "SMALL TROUGHS", green for "MEDIUM TROUGHS" and red for "LARGE TROUGHS". Very reliable trough reversal signals are ignited when the yellow signal line sinks below these thresholds and then makes a certain minimum rise (reverses direction) from a low-point below the threshold. When the troughs are ignited, coloured vertical lines are displayed to mark the trough. Red is used for huge troughs, green for large troughs and brown for medium sized troughs.

MEDIUM TROUGHS are far more frequent than LARGE TROUGHS and as a result are less accurate. There have only been 19 HUGE TROUGHS in the 13 years we have back-tested this system but they have an excellent 75% accuracy for 3 month subsequent gains and 100% accuracy for 6-month gains. The running count of the trough signals of various sizes generated since 1998 are shown in the top centre of the chart, together with the signal run-rate per month (Currently 1.8 months per signal or just under 8 weeks.)

Once a trough is flagged this is your signal to ENTER THE MARKET and go long with a SATRIX40 or a SATRIX-RESI contract. Once you have opened your trade, you then DECIDE ON YOUR TRADE LENGTH and exit the trade (SELL) when the yellow line falls below the -2.7% level (short term trade) or falls below the -6.31% level (medium term trade).

So the horizontal lines depict the size of the correction and safety of the trade (larger the correction the more chance the signal is a good one that will lead to a profit) on ENTRY and then govern the TERM OF THE TRADE (length) on EXIT. The longer your TERM, the more the probability of the trade leading to a profit and fewer trades. So the safest trades are large troughs held for the medium term.

Let us summarise that to make sure you get it right. When you open a trade on a TROUGH SIGNAL (any one) then several EXIT STRATEGIES are available when the yellow signal-line sinks below:

1. Use the orange glowing horizontal line at the 2.7% level as your EXIT for SHORT TERM TRADES.
2. Use the green glowing horizontal line at the 6.31% level as your EXIT for MEDIUM TERM TRADES
3. Use any horizontal line as safety-net exit should yellow line not reach above targeted threshold.

TRADERS WITH HIGHER RISK APPETITES can also use the white daily correction gauge-line as opposed to the yellow smoothed signal-line to take your signal cues as these can generate more frequent and more timeous signals, but obviously this has a lower confidence than the use of the yellow signal due to possible whip-saw effects of the more volatile correction gauge-line.

When you EXIT a trade then beginners are not advised to short the market, they are better off sitting in cash waiting for the next long (BUY) signal. Experienced traders can short the market (bet that it will fall) but success rates on the shorts are not as good as on the longs.

This is the first very reliable trough detector for the ALSH index we have built that DOES NOT RELY ON BREADTH DATA. It is an excellent confirmation signal for our breadth-derived trough detectors and just as accurate. In fact it generates more reliable trough signals per 10-years than any single one of our breadth- based systems. The trough signals are excellent for investors wanting to BUY ON THE DIPS but the signals are so accurate, prolific & uniform over the last 13 years that even traders can use them with confidence.

For a large, detailed view of the CGT trading chart going back to March 2009 when it flagged its first HUGE TROUGH in this current bull market, click HERE.

You can locate the CGT trading chart at the BOTTOM of the JSE TIMERS sheet in JBAR (Chart Set 12)


THE CGT LADDERED-EXITS STRATEGY 
This is a very powerful trading strategy based on CGT that doesn't select any particular  TRADE LENGTH threshold to govern the exit (as described in previous section) but works as follows:

1. ENTER a ALSH LONG trade on ANY Trough Signal (Huge, Large or Medium)
2. When you are long, ignore all other trough signals
3. EXIT when yellow line sinks below ANY of the three horizontal thresholds

The last rule ensures that when the yellow line rises above one of the exit thresholds during the course of a long trade, that the exit rule is "stepped up" or "laddered" to the next highest level to "lock in" existing gains - sort of like a trailing stop.

These three simple rules with the CGT produce enormous returns, but you need to be able to stomach losses (up to 36% of trades can lose) and live with very variable trade horizons (some trades a few days, others a few months!) The actuarial statistics of this trading strategy from February 1997 to June 2011 (14.3 years) appear below:

The strategy is vested for 75.4% of the time and turned R1 into R11.68 versus the JSE buy+hold strategy which only turned R1 into R4.32 That's almost 3 times the performance of the JSE! The above assumed no interest being earned whilst the strategy was in cash, if this was included the gains would have been even higher. 

If you have the stomach for an even more aggressive approach, you can even SHORT the market. In this case you close your longs and short immediately and cover your shorts the instant before you open new longs. This longs+shorts strategy has mind-boggling returns but only 55% of your trades will be winners - you need the stomach for losses to reap the rewards of the big gains. Its the old stock market traders saying : "no pain, no gain!"


Here is a catalogue of this strategies' trades from 1997 to 2000. The three horizontal thresholds are shown in orange blue and green and the smoothed CGT signal line is shown in red. Shaded blue areas depict periods the strategy was LONG and the white areas are the periods it was shorting the market.


Here is the trade history from 2000 to 2004:


..and from 2004 to the first HUGE trough signalling the new bull market in Oct 2009:


The signals from 2009 to July 2011 :


Currently there are only two other mechanical trading strategies in the PowerStocks stable that are reliable enough for shorting the market - HedgeTrader(medium-to-long term) and SwingTrader ULTRA (short term) As you can see from the above, the Laddered CGT strategy is no slouch either when it comes to shorting the market and we are pleased this now gives us a THIRD solid shorting strategy for the JSE.

One of the characterisitics of CGT Laddered is that it will exit a long trade only to re-open it a few days later. This may seem inefficient but is the price we pay for being kept out of the really serious declines - sort of an "insurance policy". There is no real harm done other than the loss of potential gains (as switching out then in again always leads to efficiency loss) and when the really nasty corrections arrive (which you rarely can forecast unless they are recessionary based) we are kept safely on the sidelines (or cashing in on a big short trade!)

You will notice that many trough signals may appear during the course of a long trade. Whilst the strategy we tested ignores these, there is no doubt that a system of PYRAMIDING (adding more positions to an existing trade) when you see these trough signals would enhance returns even further.

 
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