“Can somebody help me get to the Y-Axis please?”
The pic above will give you a taste of what’s to come in the USDJPY tutorial; essentially, breaking it down into English, the “jump” or “switch” in polarity of “bull moves” up and “bear moves” down without any continuous process that takes you from one to the other. In trader terms, it’s finding the limits of up versus down moves inside a probabilistic process that can give us a very good guide as to the direction of the immediate near term momentum. In other words, it’s about making more money with less risk and being absolutely on the “right side” of any market move of any significance.
The pic above is a mathematical function that is “discontinuous”; there is no way to get any value on the Y-Axis. You are either in the first quadrant or the third quadrant; there isn’t anything else. In trading, we are constantly faced with momentum changes that see prices either going up or going down; if our trading algorithm isn’t fast enough, we end up buying the highs and selling the lows and getting “chopped” to pieces. When a bigger move comes that would have been immensely profitable, you didn’t take it because there was nothing there in the market to give you any indication that this move was any different from the previous 5 that were small losers; how many of you have faced this dilemma?
The quick and easy answer from most people would be to shorten your time frames and make whatever model or algorithm you’re using more responsive and thus catch the bigger move. However, as Newbies quickly discover, all you have done is exponentially increase the rate of “false positives” into your model; you suddenly are faced with more losing positions and smaller profit gains, and this is not having the positive affect on your account balance you hoped. For most, they run out of money before they can achieve an insight into what is really in play here.
Nowhere has this sudden and sharp difference been more “at play” than in FX, starting with the CHF debacle in January 2015; since then, market disasters have been more prevalent, chaos has increased, and the sharp swings in major FX pairs pronounced more than I can ever remember in my 40 years of trading. During this time also, we have witnessed a sharp deterioration in the volatility of stock indices; “they ain’t nothing like they used to be.” This phenomenon has been achieved through Central Bank manipulation by the major western powers into the interest rate markets, through various world “plunge protection teams”, and in some cases outright buying of equity shares to prop prices up for the 0.001%.
As in any system, artificial props can’t be sustained; “what can’t be sustained won’t be.” In today’s world marketplace, in my opinion, there are really are only 2 places [markets] where the system operates on any normal kind of marketplace; gold and USDJPY. Granted, gold is heavily manipulated on the sell side by the bullion banks and dealer community through various wishes of western governments; everybody knows governments totally hate gold because it can’t be manipulated through fractional reserve banking channels. That leaves the USDJPY market as a proxy for “risk on / risk off” in world financial trading; pretty much anything that happens financially in the world first feels the ripples in USDJPY.
With that kind of influence as the world’s largest primary financial market, doesn’t it make sense the “ripples” [sometimes waves] felt here can be swift, severe, and massively switch directions at the “drop of a hat”? Well, welcome to “discontinuous functions” in applied mathematics!
The key, of course, is creating an environment where “false positives” can be lowered and signals have a greater reliability of profit; since we “don’t get somethin’ for nottin’ honey” in trading, what are the downsides, i.e. the risks on the other side of the bell curve?
After studying this problem, my conclusion is that they are “mental” in the course of trading; meaning, being able to consistently switch your outlook on direction [buy/sell] without bias. For you newer traders, this is harder than it looks and will be a challenge for you going forward; why? Because most of you aren’t used to operating on such sudden shifts in sentiment in other areas of your life, and trading brings to fore weaknesses much faster, with very manifest changes in money as a direct consequence of your actions, than anything life throws at you in other business venues or professions.
I’ve “plugged” into the volatility algorithm the concept of “discontinuous functions”, and am using a function that I think is appropriate for our use; I’ve been trading it for some time now and am very happy with the results; all that’s left is writing the manual and tutorial for your use, and I’m hoping it’s done by the end of this weekend. “I think you’re gonna really like this.”
Turning to gold today … in Asia they … “Oh hell, you know the drill!’ … gold, of course, about 15 minutes before the New York open is hitting a new low for the day … THE Mrs. asks, “why don’tcha just catch the seemingly automatic rally in Asia every night and then leave it alone?” … [Oh God, when her logic as it pertains to trading starts to make sense, have the “Pod people” from outer space invaded overnight and I didn’t see them?]
An hour into gold, and again today, we see an upper exhaustion RM=1 move with the market below the white line … am wondering when real buyers [instead of just panicked shorts covering] are going to show up and start buying lower prices in gold? … who knows!
First trade of the day directly below.
I kept this a little longer than I should have before liquidating at the orange arrow … it didn’t cost me anything of significance [about $0.50], but I should have liquidated 5 minutes earlier on the spike up … this is one of these instances where I had a little “wiggle room” on top to play with some profit … all in all took about $1 out of this puppy … “Meh.”
New highs in USDJPY for the day has not translated into anything in gold; hour before Noon in New York, and this is a clear signal to me that with an approximate $20 range today in gold, the day is over. I’m soooooooooo outta here! Until tomorrow …
Have a great day everybody!
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