Kaufman’sMost Popular Books (available on Amazon)
Trading Systems and Methods, 6th Edition. The complete guide to trading systems, with more than 250 programs and spreadsheets. The most important book for a system developer.
Kaufman Constructs Trading Systems. A step-by-step manual on how to develop, test, and trade an algorithmic system.
Learn To Trade. Written for both serious beginners and practiced traders, this book includes chart formations, trends, indicators, trading rules, risk, and portfolio management. You can find it in color on Amazon.
You can also find these books on our website, www.kaufmansignals.com.
Blogs and Recent Publications
Find Mr. Kaufman’s other recent publications and seminars at the end of this report. We post new interviews, seminars, and reference new articles by Mr. Kaufman each month.
AUGUST Performance in Brief
While most other strategies gained, the trend program remains in the doldrums. The key is the high-risk portfolio, which trades the volatile tech stocks, including semiconductors and artificial intelligence. But the Weekly Trend program gained nicely, showing that jumping back and forth based on one-day gains is not working now. We hope that the next Fed meeting will stabilize prices.
Major Equity ETFs
It’s hard to argue that investors are ignoring the fundamentals, or have we just got them wrong? Inflation is increasing, jobs are declining, and the S&P is rallying! What’s wrong with this picture?
The Fed has indicated a change in policy but refuses to say more. Are they now focusing on employment? Is one month’s data enough to cut rates, or can they even be looking to increase rates based in inflation? We’ll need to wait until the 17th of September to find out. Meanwhile, our Close-Up this month shows how to track the probability of a rate cut.
Insert Major Index
CLOSE-UP: How to Calculate the Fed Tracker, and Does it Help?
The news shows the probabilities of the Fed cutting or raising rates more often as we get close to a Fed decision. How do they do that? It turns out that the CME publishes a simple description in an article called the CME Fed Watch Tool. You don’t need to read it, I’ll tell you how it’s done.
Creating Continuous Contracts in Fed Funds
I’m most familiar with Commodity Systems Inc (CSI), TradeStation, and MetaStock. They all allow you to build continuous futures contracts. However, you will need to query them to find out how to specify them.
I’ve used the first 6 back-adjusted Fed Funds contracts, which allow me to see the probabilities going out 5 months. I would avoid using the last day of the contract, so rolling one day ahead of delivery will probably give you more reliable results. Be sure that all your back-adjusted contracts roll on the same day. You’ll want the nearby, the 1st deferred, 2nd, etc.
For CSI, Fed Funds is #74; however, it may be that the new Eurodollar data (SO3 or SOFR) is the same. You’ll need to decide that.
The Calculations
The calculations are simple. For the probability of a 25 basis point change, subtract the second data series from the first (C1014 – B1014 in Figure 1), then divide by 0.25 . If the second series is September, that our give you the probability of a 25 basis point cut in December. That’s a 52% chance as of the end of August.
Ah, one additional calculation. The data is discounted. So that a value of 98 means a 100 – 98 = 2% interest rate. So you need to convert the discounted prices to interest rates, otherwise your answer will show a cut rather than an increase, or the other way around.
Figure 1 shows an Excel spreadsheet with prices in columns B through G and the calculations in columns H through L. We are really only interested in the most recent value in Column H, showing the probability of a cut in September.
Figure 1. Spreadsheet showing Fed Funds for the next six months and the probability of those cuts based on those prices.
Note that the probability of the second cut (after September) is only valid if the first cut does not occur. Otherwise, the first cut will change the probability of the second cut. But for our purpose, we are only interested in the first two months.
So far, so good. We see the probabilities for September through January as of the last data date. The most important one will be “Prob2” the September cut, now 52%.
Do the Probabilities Mean Anything?
To find out whether any of this is useful, we need to see how the probabilities progress into an actual Fed decision. You can use an Excel spreadsheet; however, I’ve programmed it to speed up the process.
You can do the same on your trading platform by putting the nearby series in the top panel, and the rest of the continuation series in the next panels. You should have six series when you’re done. To get the nearby probability, subtract panel 1 from panel 2, then divide by 0.25 to get a 25 basis point probability.
Fed Rate Changes… or Not
I’m going to use the data from the Discount Window, which I believe will show Fed rate changes. Figure 2 shows a recent history of the Discount Window (CSI code E0RY).
Figure 2. Prices for the Discount Window,
Let’s see how the probabilities forecasted the recent run-up (from 2022) to now.
Fed Meetings in 2025
The following dates are the second day of the Fed meetings, when they release their results. We have the next announcement in 17 days.
- Jan 29
- Mar 19
- May 7
- Jun 18
- Jul 30
- Sep 17
- Oct 29
- Dec 10
To give you an idea of how these forecasts change, Figure 3 subtracts each day from the next day. More recently, the changes were to the downside (rate cuts), but they were all spikes. The most recent changes would have been the producer price index, which increased by 0.9% on 8/14/2025 (probability of a cut jumped from 40% to 52%), and Fed Chairman Powell’s speech at Jackson Hold on August 22 (probability of a cut jumped from 46% to 52%).
After each jump, the probabilities have reverted slightly.
Figure 3. Changes in forecast.
Current Probability of a Rate Cut
The beginning of 2025 showed that all Fed meetings had only a 10% to 30% chance of a rate cut. But let’s look at the nearby contract, in dark blue in Figure 4. The biggest move happened on the last employment report, which shows a decline in employment as well as a nasty adjustment (decline) in the previous report.
Figure 4. Rate cut probability going forward.
You may find it interesting that each month going forward shows a greater likelihood of a rate cut. If nothing happens now, the chance of a cut in December is 60%. Not that we expect that to happen.
Trading the Probabilities
How do you trade a 50% probability of a rate cut? You can’t. The calculations show that it is already in the market. To trade the September Fed action you will need to decide if it will definitely be a cut, or maybe even an interest rate rise? Is it possible that anticipated inflation will offset the labor decline?
While the probabilities are interesting, they are in the market. I can’t offer you more advice than that.
A Standing Note on Short Sales
Note that the “All Signals” reports show short sales in stocks and ETFs, even though short positions are not executed in the equity portfolios. Our work over the years shows that downturns in the stock market are most often short-lived and it is difficult to capture with a longer-term trend. The upwards bias also works against shorter-term systems unless using futures, which allows leverage. Our decision has been to take only long positions in equities and control the risk by exiting many of the portfolios when there is extreme volatility and/or an indication of a severe downturn.
PORTFOLIO METHODOLOGY IN BRIEF
Both equity and futures programs use the same basic portfolio technology. They all exploit the persistence of performance, that is, they seek those markets with good long-term and short-term returns on the specific system, rank them, then choose the best, subject to liquidity, an existing current signal, with limitations on how many can be chosen from each sector. If there are not enough stocks or futures markets that satisfy all the conditions, then the portfolio holds fewer assets. In general, these portfolios are high beta, showing higher returns and higher risk, but have had a history of consistently outperforming the broad market index in all traditional measures.
PERFORMANCE BY GROUP
NOTE that the charts show below represent performance “tracking,” that is, the oldest results since are simulated but the returns from 2013 are the systematic daily performance added day by day. Any changes to the strategies do not affect the past performance, unless noted. The system assumes 100% investment and stocks are executed on the open, futures on the close of the trading day following the signals. From time to time we make logic changes to the strategies and show how the new model performs.
Groups DE1 and WE1: Daily and Weekly Trend Program for Stocks, including Income Focus, DowHedge, Sector Rotation, and the New High-Risk Portfolio
The Trend program seeks long-term directional changes in markets and the portfolios choose stocks that have realized profitable performance over many years combined with good short-term returns. It will hold fewer stocks when they do not meet our condition and exit the entire portfolio when there is extreme risk or a significant downturn.
Equity Trend
A big difference between the Weekly portfolio, gaining nearly 9% and the Daily portfolio which lost fractionally. It explains the market, which has been jumping around from one sector to another. We’re hoping that the Fed meeting on the 17th may clear up some uncertainty. Meanwhile, investors are still buying.
Income Focus and Sector Rotation
Small gains in the Income Focus program may be a forecast of lower rates to come. Market anticipation has not been great this year, with the Fed holding steady. This might be a change.
Weekly Sector Rotation
This month the Sector Rotation program gained over 2%, better than the S&P but still far behind. The program has switched back and forth from utilities to energy and back again. Energy seems to be declining again and utilities have been safe.
DowHedge Programs
Another case of the Daily and Weekly programs producing different results, but in this case, the Daily DowHedge program is ahead by 12.3% for 2025, better than the S&P. While the Weekly DowHedge program gained, it still needs to recover from an earlier loss.
High-Risk Portfolios
After a come-back last month, we lost it all this month. Are the AI stocks and semiconductors now of no interest? There’s a lot of news about these stocks, but none of them seem to result in a rally.
Group DE2: Divergence Program for Stocks
The Divergence program looks for patterns where price and momentum diverge, then takes a position in anticipation of the pattern resolving itself in a predictable direction, often the way prices had moved before the period of uncertainty.
Not much movement for the Equity Divergence Program, with the 10-stock losing fractionally and the 30-stock gaining 3%. This is again a statement of the way the market is moving. It’s a short-term strategy based on pauses in the trend, not on the trend itself. So far, that seems to be a good plan for this year, with the 10-stock portfolio higher by 15%.
Group DE3: Timing Program for Stocks
The Timing program is a relative-value arbitrage, taking advantage of undervalued stocks relative to its index. It first finds the index that correlates best with a stock, then waits for an oversold indicator within an upwards trend. It exits when the stock price normalizes relative to the index, or the trend turns down. These portfolios are long-only because the upwards bias in stocks and that they are most often used in retirement accounts.
A nice gain for the Timing program, higher by 4.2% for the 10-stock and 2.6% for the 20-stock. While it is still below the S&P returns, it is closing in nicely. New highs in both portfolios.
Futures Programs
Groups DF1: Daily Trend Programs for Futures
Futures allow both high leverage and true diversification. The larger portfolios, such as $1million, are diversified into both commodities and world index and interest rate markets, in addition to foreign exchange. Its performance is not expected to track the U.S. stock market and is a hedge in every sense because it is uncorrelated. As the portfolio becomes more diversified its returns are more stable.
The leverage available in futures markets allows us to manage the risk in the portfolio, something not possible to the same degree with stocks. This portfolio targets 14% volatility. Investors interested in lower leverage can simply scale down all positions equally in proportion to their volatility preference. Note that these portfolios do not trade Asian futures, which we believe are more difficult for U.S. investors to execute. The “US 250K” portfolio trades only U.S. futures.
No news on tariffs allowed the Futures Trend program to gain from 1% to 2% in August, not great, but still a gain. Program remain substantially down for the year, but the end of the year can change that.
Group DF2: Divergence Portfolio for Futures
Better than a 4% gain in all portfolios put this mostly in the black for the year. Hard to see on the chart, but a rally starts with a small move!
Blogs and Recent Publications
Perry’s books are all available on Amazon or through our website, www.kaufmansignals.com.
August 2025
The September issue of Technical Analysis of Stocks & Commodities has Perry’s article “Using the Elusive Volume Confirmation.” While volume has been an important component of price movement, Perry takes a look at how useful it has been.
July 2025
This month (the August issue) there is an article on “Explaining FX Carry (In Detail).” The Carry program has had years of profits followed by years of losses, yet it is a very important part of institutional trading. This article shows how it is actually done.
Perry has been asked to be the Keynote speaker at the IFTA Conference in London in 2026 (not this year!). Of course he will accept. Plan to be there!
June 2025
Yes, another article! “There is Money To Be Made On The Weekends – But You Need to Know The Market,” appeared in the June issue of Technical Analysis of Stocks & Commodities.
Perry gave a Webinar to “Trading Heads” in Mumbai, India on June 5 at 9:30 AM New York time. Discussed “Not the Usual Diversification.” With any luck, it was taped.
May 2025
You’ll find Perry’s article “Trading the Channel” more interesting than usual. Published in the May issue of Technical Analysis of Stocks & Commodities, it looks at various ways of construction a channel, and one very profitable one.
Perry also addressed a Spanish class where they are building algorithmic strategies. Called ROBOTRADER, it in ETSIT-UPM (Escuela Técnica Superior Ingenieros Telecomunicación- Universidad Politécnica Madrid). The presentation is about Diversfication (in English) and available on youtube.
April 2025
Perry did a studio interview with Jeff Baccaccio (“Rfactory”) in London in March. It is a fine production and a good interview. He has put it on youtube. I hope you enjoy it.
YouTube: https://youtu.be/jmR359jHYBQ?si=IHQ5bVLijGFM19qF
Another article in Technical Analysis of Stocks & Commodities for April, “Do Stops Really Work?” The conclusion even fooled Perry.
March 2025
Perry looks at an old standard in “Revisiting the 3-Day Trade,” which appeared in Technical Analysis of Stocks & Commodities in the March issue.
February 2025
Another article, “Chasing the Market” appeared in the February issue of Technical Analysis of Stocks & Commodities. It answers the question, “Can you make money entering the market after a big move?”
Perry enjoyed the “Fireside Chat” at the Society of Technical Analysts (STA) in London on Tuesday, February 11. It should be available for viewing on their website. He also taped another interview and we’ll let you know how to see it when it’s released.
He also posted “If you think the market will tank, here’s a plan” on SeekingAlpha. It has received lots of view and good comments, although it is advising deleveraging.
December 2024
“Overlooked Strategy Rules” appeared in the December issue of Technical Analysis of Stocks & Commodities. We tend to overlook certain rules that can make a big difference to results. This article looks at scaling in and scaling out of a position, delayed entries, correlations, and other simple but important rules.
October 2024
“Trading a Breakout System” was published in Technical Analysis of Stocks & Commodities. It looks at whether it’s better to enter on the bullish breakout, wait for confirmation, or buy ahead of the breakout. It’s a practical look at improving breakout results.
September 2024
Two articles posted by Perry, “The N-Day or the Swing Breakout,” (Technical Analysis of Stocks & Commodities) looking to see which is better. You would be surprised.
A look at deleveraging Artificial Intelligence stocks, a shorter version of the article posted in our “Close-Up” section. It appeared in Seeking Alpha earlier in September.
Older Items of Interest
Perry did a studio interview with Jeff Baccaccio (“Rfactory”) in London in March 2025. It is a fine production and a good interview. He has put it on youtube. I hope you enjoy it.
YouTube: https://youtu.be/jmR359jHYBQ?si=IHQ5bVLijGFM19qF
Perry was interviewed on June 27, 2024 by Simon Mansell and Richard Brennan at QuantiveAlpha (Queensland, Australia), a website heavy into technical trading. It appears on their website.
On April 18th, 2023, Perry gave a webinar to the Society of Technical Analysts (London) on how to develop and test a successful trading system. Check their website for more details, https://www.technicalanalysts.com..
Perry’s webinar on risk, given to the U.K. Society of Technical Analysts, can be seen using the following link: https://vimeo.com/708691362/04c8fb70ea
For older articles please scan the websites for Technical Analysis of Stocks & Commodities, Modern Trader, Seeking Alpha, ProActive Advisor Magazine, and Forbes. You will also find recorded presentations given by Mr. Kaufman at BetterSystemTrader.com, TalkingTrading.com, FXCM.com, systemtrade.pl, the website for Alex Gerchik, Michael Covel’s website, TrendFollowing.com, and Talking Trading.com.
You will also find up to six months of back copies of our “Close-Up” reports on our website, www.kaufmansignals.com. You can address any questions to perry@kaufmansignalsdaily.com.
© August 2025, Etna Publishing, LLC. All Rights Reserved.