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Forecast Oscillator Trading System by Steve Karnish

Many moons ago, I posted a little linear regression system that featured
the Forecast Oscillator. The response was surprising (lots of it) and today, I still communicate with many of the original respondents. I've continued to use the same "framework" for my testing. In an earlier post today (a private email that made it to the list...I'm a little dingy tonight...had to get up a 5 am to trade cocoa), I alluded to using the CMO. I've used many indicators in these tests (i.e., Forecast Oscillator, a modified Time Series Forecast, MACD Histogram, Bollinger Band Histogram, CMO, & others).

Before I explain the method to my madness, please read the following sentences carefully. Backtesting systems is very dangerous. The act of backtesting is not the dangerous part... believing that the results can be duplicated in the future is very dangerous. Let's face it, we are "best fitting" circumstances to static prices etched in stone. So please, I'd prefer not to hear the lectures about the folly I pursue. I've been system testing since 1975 and I've made a bazillion mistakes (and a little chump change) over the years. I'm still looking for the holy grail. So, here's the outline:

Forecast Oscillator Trading System

Enter Long:


Close Long:


Enter Short:


Close Short:



You can substitute any standard formula for the ForecastOsc or you can put in a custom formula (just remember that custom formulae need to look like: fml("Karnack's SuperSecret") It's in your manual.


In this search "opt3" represents the number of days inserted into the forecast oscillator. I usually use three (3) to ten (10) for the forecast oscillator, but if I'm using a custom formula, sometimes I don't even need opt3, because I using a fixed set of parameters within the custom formula.


Opt1 is the numeric value below a zero basis line that will trigger a long position and close out the short. Yes Virginia, in my secular little world, I prefer stop and reverse trading. The parameters for this option depends on the commodity (and yes, it does work on stocks) you're trading. One must eyeball the forecast oscillator to see how far it swings above and below zero. For the forecast oscillator, I usually use 0 to -3.


Opt2 is the numeric value above a zero basis line that will trigger a short sale. Zero to 3 seems to work for this formula.


I step opt3 using whole numbers to represent days. With Opt1 and Opt2, I use: .1 steps.

Other indicators:

When substituting the CMO (or any indicator) for the Forecast Oscillator, one must be aware of the terrain the indicator travels over. It would be ridiculous to us zero to 3 (as the optimizing numbers) if the mid point is 50 and the indicator traverses between +10 (on the downside) and +90 (on the upside).

The overall theory behind this test is that many indicator oscillate from positive to negative and back again (duh). The trick is not to trigger action when the indicator turns in a new direction (if you're interested, I've been down that road and I'm still wearing a neck brace from the whiplash). The theory is that once an indicator extends to a certain level, the market is either overbought or oversold.

In downtrending markets (can you spell deflation?), the short sale trigger (opt2) is going to be closer to the zero basis line than opt1. Please see the attachment. What will happen when the grains, cocoa, crude, and damn near everything else starts to go up? Good question Steve! The system will not perform as well if you continue to use the same parameters. In a perfectly sideways market, one would assume that the trigger points would be equal distance from zero. As in many markets, this system works better when things trend indefinitely.

I hope this post will help others who have inquired about the linear regression system. Attached is the original system, using the Forecast Oscillator, for March Crude Oil. In this example, opt3 is set to 8 (number of days in the forecast oscillator); opt2 is .1 (sell signal); opt1 is -2.3 (buy signal).

To quote R.N. Elliot: "Even though we many not understand the cause underlying a particular phenomenon, we can, by observation, predict the phenomenon's recurrence."

To qoute Karnack (my alter ego): "I got knocked down seven times and got up eight".

Finally, from a trader on the realtraders forum: "Futures trading involves financial risk, lots of it".

Sweet dreams,

Steve Karnish

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