## Thursday, October 27, 2016

### VOLATILITY ALGORITHM PROBABILITIES

“Gorilla? … I’m NOT thinkin’ causation here … who cares about the Gorilla?”
Yesterday, I wrote about the “perils & pitfalls” associated with probability theory and how most people [and by default that means traders as well] have a “predetermined idea in their head about the “how/when/where/ and why” things should happen, in what to them is a rational, probabilistic, logical sequence of events and unfold accordingly; only problem is it almost never happens this way, and when pure “dumb luck” strikes most hapless traders associate it with brainpower.
Back when actual trading pits ruled the world, every month new traders would get “released” onto the floor after their orientation; the absolute worst thing that can befall a new trader? Making a shipload of money their first week of trading; “shit this is easy, where the hell has this been all my life?” EXIT QUESTION: When a market goes straight up or down for the week, and you happen to ‘piggyback’ it and make a shipload of money, how much of this money you just made is directly attributable to you and your so called brainpower?” SHORT ANSWER: “The law firm ‘Zip, Zero, Zilch & Nada’ is calling you!”
The easiest way to make a point is by using absurdity on itself; in other words, going “over the top” in regards to something that at the same time proves your point.
I could easily come to all of you and say, I got a ‘system’ that is 100% guaranteed to be right and profitable 100% of the time; every time gold rallies for the day, this ‘indicator’ precedes it every single time! You interested?”
“Every day gold rallies, the sun rises in the East; just look for gold to rally as the sun rises [maybe].”
Of course, we can all see that not only is there no “causation” between the mutually exclusive events, but the same thing happens when gold goes down as well; in other words, all outcomes have a probability = 1.
Ok, so what makes the volatility algorithm work successfully for those that use it? 1) I take the underlying math [messy & complicated that only hurts most people] and internalize it to a visual screen; fact is, you become a “Pavlovian Trader”. You know what makes you money, you see the identifying patterns on the screen, you want that money, and “by God I’m hittin’ that damn button to get me some of that dinero!” 2) As I write in the tutorial extensively, the trading signals “flow backward” from the exhaustion lines, and the internalized math of the M1 signals put us in “the proper conditions” [meaning highest probability you will ever see] for a profitable trade. 3) Along with momentum now on our side, we are in a position of strength in regards our position, because once the market starts heading upward, we can take advantage of the dealers & bullion banks by using their power to allow and/or create “spikes” and sell into it [“Wait … what? … You’re a customer … you’re supposed to be buying here … damn these guys!]. Whether it’s an exhaustion line “hit” or simply a “mini-exhaustion” above average spike up since the trade started, it makes no difference; we’re there to liquidate in favorable conditions, cuz outside of the dealers & bullion banks who are absorbing the buy orders, who else is selling? Short answer: more than likely only us.
A couple of recent examples should be instructive. First a recent gold exhaustion move from 10/24/16, and then the DOW30 exhaustion move yesterday; both are on RM=1 mode. Directly below both charts in respective order.

Above, we got exhaustion hit examples in 2 different markets; please take a look at where the moves started. What you should notice is that they are very close [ a few minutes tops] from where a “buy” signal is given via the volatility algorithm when 2 criteria are present; 1) plum line is under the yellow line, and 2) the slope of the plum line changes from negative to positive. And as you will discover [to what should be your utter amazement] in the tutorial, every damn exhaustion move in both markets starts this way! [And there are literally “hundreds” of data points (meaning charts with commentary) for you to look at and see with your own eyes; bull days, bear days, choppy days.]
So, what’s the “upshot” of all of this? Well, it’s the fact that the algorithm always puts you in position for an exhaustion move before it happens; and “it” happens a whole helluva lot more times than you would otherwise think without the data supporting my premise. Without the algorithm, you don’t capture these moves mainly because you don’t see them coming; you don’t see or feel the momentum change in time to position yourself to take advantage of the moves. As such, you either miss the move entirely, or get in late at very bad price that cuts into profitability severely.
Remember the premise of “above average volatile” markets? Ok, if that is indeed the case, then we know with almost absolute certainty that at some point [or points] in the day we are going to see this stuff fly “hard & fast”; question is, can we be there to capture some of it or do we miss it because we didn’t see it coming? That’s why I have always said, “You give me an above average volatile market versus other markets, with intraday volatility that is higher than most, and I guarantee I will make a fortune over time because 1) I know it’s going to move and hit stops, 2) my algorithm will always put me in the proper position to take advantage of it, and 3) I’ll be the only guy selling into strength or buying into weakness when I liquidate while the rest of the world is doing the opposite, thereby assuring me of great fills.” And while I might leave some “money on the table” by getting out early sometimes as an exhaustion move continues on its merry way, I don’t really give a shit because I just booked some serious green for myself and I fully realize the old adage, “bulls & bears make money, pigs never do.” Trust me, do this damn near every day, and you got very few financial worries in life any more.
Now, today’s post is just the “tip of the iceberg” of what’s coming in the tutorial; I get into a lot more detail with examples and I explain the math involved so everybody can logically see why this works and makes you money over time. I literally prove the premise that the algorithm does in fact make money over time if you follow the rules and can exhibit patience & discipline by waiting for your trades; you do that, and it’s only a matter of time before the ‘Pudding Business’ is simply a bad dream!
Turning to today’s gold trade, “seriously folks, I can’t make this shit up.” First and most likely last trade today directly below.

Well, here it is for everybody to see; 1) market price is above the white daily calculated horizontal white line, 2) plum line goes below yellow line, 3) slope of plum line goes from negative to positive, thus giving buy signal, and 4) market moves to exhaustion lines for liquidation. All in all, about a \$4 per Oz. profit. “Thank you, I’m outta here!”
Now, did I somehow know gold was gonna do this? In the famous telepathic words of the dog, “Whaddaya fuckin’ nuts?” Ok, so why didn’t I get out on the above average spike a couple of minutes earlier? “Because the daily range is so low at about \$5, the probability is very high that will not hold going forward; at the moment I’m in the trade, momentum is clearly on the upside. I’m in around 1268.50, so I’m raising my sell stop as it goes up; my mental stop at the time you are talking about is now 1269.00; I see this bid price and position gets liquidated. Bing! Bang! Baddaboom! Next thing I’m seeing is price hit the upper exhaustion line and I don’t hesitate in hitting the liquidate button; fill is only a few pennies off the high.” Seriously, what more do you want from trading?
But here’s the thing; even if you did liquidate on that spike up a couple of minutes earlier, it’s not even a Dollar per Oz. difference from the exhaustion hit; granted, you may not like the fact, but the overall difference in the scheme of things is miniscule. Bottom line is, you still made money on the trade!
And so, here we are a little later [about half an hour], and you can see just how well the exhaustion lines “pegged” this move directly below.

And quite frankly, the equity markets don’t open for another half hour, so with this exhaustion move in gold making me about \$4 per Oz., it’s time to turn my attention to the DOW30 [or crude oil if necessary]. Like I said yesterday, the best of all worlds for a U.S. trader; gold early and then depending on what’s happening, the DOW30 for the rest of the day [when, in the early to late afternoon, most likely gold isn’t doing shit.].
And of course, a beautiful “Chamber of Commerce” day today [like most days really] is likely to pull me away early; we’ll see. I’ll give the DOW30 about an hour to “get its act together” and see if it can do something, otherwise I’m outta here.
And just so you know I’m actually human and alive, and not some robot on life support living in Mom & Dad’s basement in Bumwater, Idaho, yesterday I took some shots from my phone directly below.

“God, who is that male model roaming the beach?”

I got the beach to myself; dog is running around somewhere, and it’s like I’m ‘Robinson Crusoe’ all alone on some deserted stretch of beach. “Yea, I know, I need a frickin’ haircut … the Mrs. is on my ass … says the dog and I look like brothers … I say, ‘Ok, can I have some bacon now?’ … and that shuts her up.”
Well, it’s official … I’m outta here early … DOW30 can wait for another time … got golf balls to hit, free lunches to eat, and then deserted stretches of beach to myself to contemplate the meaning of life & trading with my BFF … wouldn’t want it any other way … I’m sooooooo outta here … until tomorrow mi amigos!
Have a great day everybody!
-vegas