David Buffalo is a chemical engineer by trade, but he has been trading part time since 1978. He was so interested in the financial markets that he left a good manufacturing job to help another entrepreneur start a brokerage firm in 1993. In 1995, he decided to cut loose all ties and start trading on his own. Though he started an export business in 1997, the business began to die about two years ago. From that point, he decided to trade full-time and scale up his operations. He began by trading bond futures exclusively, but then shifted into stocks to lessen the volatility and constant attention that futures trading requires.
For a while he swing-traded using the knowledge of patterns and signals he had developed, but he felt he needed more consistency. He also wanted to determine which of his patterns were working the best. He wanted a mathematical model that provided him with more safety.
Before the big bear market started in 2000, David was one of those smart enough to liquidate. "That's when I decided to get serious about neural nets," he said. "I decided to go with Ward Systems Group because you guys have been in business and doing neural nets longer than anyone else."
David purchased the NeuroShell Trader Professional and started using the Prediction Wizard to build his neural nets. "I now make about $400 per day on a total average investment of $40,000," he is not bashful about pointing out. "I get as many as 85-90% of my trades right." Not a bad daily return indeed! This is doubly good when you consider that Dave only goes long and it has been a largely sideways market. Moreover, Dave is managing his IRA account, so his funds increase tax deferred. Dave also manages a separate taxable portfolio of long-term positions. All of the buy points are generated using NeuroShell Trader Professional and assisted with common sense stops.
Dave has devised a clever series of inputs which even we do not really understand, but basically, he describes a set of patterns using boolean and > and < rules, and then lets the optimizer find the rules which make the most profitable inputs to his nets. He uses Fibonocci retracement levels in his descriptions.
When we asked him why he didn't use the Fuzzy Pattern Recognizer add-on, he said "I didn't want to change what I'm doing just yet, because it's working so well. But I plan to experiment with that soon."
Dave's first "secret" is that he selects stocks that are basically sound fundamentally. He filters out any stock with fluctuating earnings, and winds up building nets on sectors that are poised to move up anyway.
Then Dave does what he calls a "common sense" analysis to determine if he likes the resulting signals and nets. First, he looks for around 70% correct trades. He also looks at the win/loss ratios, hoping to find a ratio of greater than 1.5/1.He then verifies that the signals match the patterns he has developed. He isn't hesitant about throwing out models that fail to meet his criteria. "I'm not looking for the perfect model", Dave says flatly.
We asked Dave to describe his nets more. "I predict the change in open 5, 10, or sometimes even 15 days out. I use full optimization to select about 5 inputs and the corresponding best pattern parameters. I use two walk-forwards of about 6 months each, and I train on about 5 years of historical data."
Do you override your nets if they look like they aren't working?" we asked. "Sometimes, if there is some more attractive stock and model to put my money in," was the reply. "I have my own mental trailing stops."
We asked Dave if he planned to do any short selling. "Nope, I'm going to use puts - that's my next step," he said confidently. And after our interview with David Buffalo, we are certain he will more than double his rate of return when he starts using options.
Update 12/11/2002 - We received the following message from David Buffalo-"Thanks again for all your help, and for NeuroShell Trader Professional. 2002 was my best year ever on a percentage and dollar basis, and I have the confidence that next year will be even better."
Update 12/11/2003 - We received the following update from David - "So far this year, my combination trades (swing trades) have averaged about 69% per annum. Thatís better than even the high-flying NASDAQ, and I am invested in the market only about 33% of the time (that is, the strategy is RISK-AVERSE). I started trading with net $5,000 positions a year ago. Now I am at net $25,000 positions. The goal next year is to be at net $65,000 to $80,000 positions (it might not work, but net $25,000 was my goal for this year, and I hit it). And thatís with no futures or options. NeuroShell Trader is still the backbone of my trading program."
Update July 2005 - David Buffalo is now writing articles and neural network predictions to www.mrswing.com. His articles are posted just before 9am EST.