The Ultimate signal is a mechanical system which aims to determine when a sustained up or down trend has been established. The foundation is a trend following system. However, it will also issue buy and sell signals when conditions are met indicating a market bottom or top.
There will be a BUY signal about 75% of the time. A SELL signal is issued when the model indicates there is higher risk of a down trend. A SELL signal is like buying insurance, it doesn’t always pay off but it keeps you safer.
There are often a lot of false starts to a down trend with a sharp V bottom after a few days that quickly reverses. They are usually driven by automatic program trading. A lot of people get scared and sell low just before the sharp upturn. The model attempts to weed out those traps and not issue a sell signal at every sign of trouble. There will be times the model will be long and there will be a sustained down trend. When that happens the model will not generally sell but will ride it out. I have tested many methods to limit loss such as adding a trailing stop. In the long run, it hurts performance. It creates too many false sell signals to make up for the few times it pays off.
The overall philosophy could be summed up, “Be slow to sell and quick to buy.” If you just had a model that issued random signals, it’s buy signals would be right 75% and it’s sell signal would be wrong 75% of the time. I didn’t start out with that philosophy. After years of model development and testing, that is how things shook out.