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Friday, August 12, 2016

SPEED OF LIGHT TRADING

IMPORTANT NEWS WORTH NOTING


Thank you retail sales in the era of “Hope & Change”; “unexpectedly” of course. And with that “unexpected” horrible number came the official yawn for stock indices; after all, as I have said before, nothing can interfere with the official narrative going forward that “everything is F-ing awesome baby!”

However, the gold shorts took it in the … well … shorts; nothing like a good old fashioned “melt up” on a Friday morning that sees prices surge by about $13.50 per Oz. in 17 minutes, half of that coming in the first minute. And to be sure, afterwards we get to see 2 down moves to the lower exhaustion lines just like yesterday; one of them eminently tradable and the other to be left alone because the range is too high for the day and the day is getting a little short in the tooth.  As Captain Obvious would say, “Who knew Gatorade wasn’t for alligators?”

Now, one of the hallmarks of a very long and storied trading career is to NOT trade reports; hell, go to Las Vegas if you want to “roll” and get the comps; trading houses will be the last place you’ll even get a kiss before they 1) rape your fills, and 2) not even say “Thank You, come again!” So, to be sure, I’m not gonna trade the retail sales report; I could care less if I miss something; the algorithm will be there later to guide me, and that’s all I need.

Besides, who wants to look like this being on the wrong side of a Department of Unicorns & Fairy Tales economic report?

So, after seeing the gold price “melt up” past the RM=1 exhaustion lines, it’s time to show some patience and wait for the plum line to get near or below the yellow line and then change slope OR if we get a decline to buy at the lower exhaustion line [rare, but it does happen every now and then like today; thank you retail sell stops who bought the high]. Directly below is the trade of the day.


Now, it’s important you understand the algorithm here; at the initiation of this trade, the daily range is now slightly over $21 per Oz. Exactly where do you expect the range to be at on the close? It’s not a rhetorical question, since the probability of seeing the range expand from here [up or down] is small. Having said that, I know I have to be somewhat nimble on the way back up; shorts a little too late in buying the break will prop the price up for a time, so what I’m looking for is what the algorithm calls for to liquidate. AND THAT IS AN ABOVE AVERAGE “UP” SPIKE SINCE THE INCEPTION OF THE TRADE; when I see it, I’m not waiting for the M1 red candlestick to liquidate because my fear is that I will give up too much in slippage to get a decent fill. I have to use the up move and when it stops going up in this spike, I have to liquidate; it’s the only way to get a good price. I understand and accept the fact it could go higher, but seconds matter here, and if you are trading numbers [large volume] you have to be early and leave the last pennies for somebody else.

OK, so here I am with about a $3 profit and the day has hardly started; the problem is the range is $21 and for me to get in another trade on a Friday is not likely. To be sure, there were other algorithm trades that were available after this initial trade, and all of them had slight profits; but the point is I don’t care about them because of the range. That range has a very small probability of expanding, which means quite simply trades going forward are going to run into a “wall” and are likely to back off quickly leaving you disappointed in the trade.

If you think FX moves fast, nothing moves faster than gold; watching the bid/offer in a “stop hunt” will show you just how fast price can go down in just seconds. The pain will only last a few seconds, but the memory will linger for a very long time; therefore, it is imperative you make the “high probability” trades the algorithm calls for and leave the rest alone.

As I write, gold has gone over the cliff “Thelma & Louise” style, and skidded along the RM=1 lower exhaustion lines down to the low 1340’s; is the market price hitting these lower exhaustion lines a buy signal? Simple answer: NO. Why? Because once the daily range exceeds the $15 - $17 per Oz. area, no matter the number but usually between $15-$17 on the low side to $22-$25 on the high side, gold is finished for the day.

This represents about a 1.25% to 2% intraday move, and if you look at gold throughout history going back about 40 years, you’ll see that very rarely does gold ever go past ± 2% of price intraday. It happens, like in 2012 after a huge bull market run up prices started to collapse, but I surely wouldn’t trade off of a probability that has less than a 2% chance of happening on any given day.

All of this goes to the heart of what it takes to be successful trading gold from the long side; namely, use the algorithm signals and rules as the daily range is expanding, and when the “run” is over, quit for the day. You hang around and try and get more, and what you don’t realize is that the probabilities have shifted due to the higher daily range, and what you will see happen more often than not is your profits taken away from you.

Have a great weekend everybody!
-vegas

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