Dr. Hans Hannula, PhD, RSA, CTA

As a researcher, I constantly think, ponder, and theorize about why
markets move the way they do. Over the years, I have learned more
and more about the mysterious forces that move markets, ourselves,
and the universe. One of the problems I have pondered is ** "How
predictable are markets?" **Many say markets cannot be predicted
at all. That is the random walk theory. Some have claimed that they
could perfectly predict markets. That's the deterministic theory.

I have found that neither works. What does work is

So another question I have pondered long and hard is ** "How can
markets be predicted within a domain of behavior?" **My approach
has been to seek out the physical laws that move prices, similar to
the laws of physics that move balls dropped in bowls. Through painstaking
research I have found that there are forces that move prices, physical
forces. The source and patterns of these forces were revealed in
my

I asked ** "What is the mathematical relationship between those forces
and price action?"** If I could find the answer to that question,
I could predict future price action, at least within domains. I needed
an new insight.

Such an insight came to me the morning of January 23rd, 1996. As I awoke, an idea came that said,

"It's energy absorbion. Compute the energy being absorbed
from the universe, and it will tell you where prices are going, for
prices ** are **energy."

That insight became the ** XGO** program, because for any market

At first it may seem incredible that this can be done. But it is really not. If one understands the equations of motion of a ballistic body, such as an arrow shot into the air, one can compute its flight path. One simply needs the formula, and the launch data, such as weight of the arrow, the initial angle, the velocity, and the acceleration. From there it is "plug in the numbers and turn the crank." XGO, in a similar manner, computes the "energy flight path" of a market launched into the universe.

The XGO formula captures the harmony of energy flow from the universe
into a stock, a commodity, or a person. It translates the graphical
beauty and power seen in

Figure 1 is a chart of the Swiss Franc and its XGO forecast. The thin line is the XGO forecast. Notice how accurately it drew the price line in advance. Note the day to day detail. And the fine timing of highs and lows. Pretty impressive, huh? Almost perfect.

Not statistically ** perfect**. Just

So how good is that Swiss Franc XGO forecast? It computes to .61,
a solid **GOOD**. Not bad for something ** using no price data. **Such
is the power of a fundamental theoretical approach.

XGO is not a perfect model of prices. It only computes the energy
input to a market. The market uses that input and its own internal
properties to produce the price output. For example, there are points
in time when a market is at a ** chaos balance point**. The ball
is on the rim between the bowls.

At those points, a sharp break may occur and prices move much further
that XGO predicts. This is a ** "quantum shift**", or "

Everyone wants to know about the stock market. Where is it going? Figure
3 shows the S&P 500 XGO forecast for the first part of 1996. Notice
how well it has forecast the turns,** especially those spike lows.** For
years I have worked on annual forecast methods. XGO tops them all. From
February to early July, that forecast is a .614, a solid

So can XGO really help your trading? The way to answer this is to look at an example. Figure 4 shows Tbonds, and the XGO function for bonds. Notice that while the forecast is not perfect, that it is pretty good. There are areas where the forecast does not work well. So to protect oneself from those times of poor forecast, one has to use trading rules. We have found these rules effective.

1. Make all entries and exits with stop orders.

2. Trade in the direction of XGO

3. Protect positions with a stop that trails XGO

Tbonds have been included in our hotline and newsletter position trading portfolio for nearly 5 years. We felt bonds were a key component of a balanced portfolio. But the trading results were not pleasing. They weren't bad-just not great. For four years we would win some money, then give it back. As shown in Figure 5, our equity moved about Zero, plus or minus $4000. That portion of our portfolio was stuck in a trading range.

XGO changed that. Since applying XGO to this market, we've broken out of the trading range and established a nice trend. Be advised that past results do not guarantee future results, and that trading futures is risky.

We have found that the key to reducing that risk is a constant search for new technology. XGO is a part of that technology. It is making a difference in our results.

So I have learned that markets ** can be predicted, at least within
the limits of chaos theory**. XGO has been a valuable addition to
my trading toolbox. Used carefully, it can give one a trading edge.
Over the several months since it came to me, I have learned that XGO
is