Tuesday, November 15, 2016

ALGORITHM THEORY & LOGIC

“You don’t see me wearin’ ‘em do you?”

I want to step back for a second and have you look at the “logic” and the ”theory” behind the volatility algorithm; it isn’t what it seems, and many traders trap themselves into faulty logic when trading many methods that lead to some big losses.
From our life experiences and starting as early as grade school, all of us were taught the following; 1*A = A*1. And of course, it made perfect sense to us, because what difference does it make if I multiply an orange by the number “1” or multiply the number “1” by an orange? I still end up with an orange in my frickin’ hand! Nobody in 3rd grade math class raised their hand and said to the teacher Mr. Doofus, “Yea, I see where you’re comin’ from with this ‘commutative’ and ‘associative’ theories of arithmetic, but last night I was reading Godel’s ‘Incompleteness Theorem’ and I was wondering if either or both of these theories are provable, or is it just an assumption we have to make?”

And, if you did happen to be in that math class, you know that Elroy got his ass kicked during recess next period for being a teacher “suck up” and that if you had any questions about shit like this to keep them to yourself cuz all anybody wanted was for that class to be over with, without you giving the teacher “ideas” about homework. Better to just leave Mr. Doofus hanging up there in his moronic tones rumbling about shit nobody cares about, while in the back of his mind he’s already thinking about fishing next weekend. “Elroy, STFU or you're dead!”
That leaves you to go through life thinking, without thinking really, under what circumstances these theories about math you’ve taken for granted your whole life don’t hold and aren’t valid. Cuz, when you get to trading B*A ≠ A*B. And neither does “if A, then B” = “if B, then A”. And if you try, through your algorithm or trading method, to take these “round holes” and blast them through the “square peg” of a market, bad things are going to happen you weren’t expecting. What you don’t know about markets can kill you; choose the form of your destruction.
Taking the second example first, where all this breaks down for most traders can be looked at this way: assume any “buy/sell” signal to trade from any method, system, or algorithm is event “A”; then assume, the outcome from that signal [profit or loss] is event “B”. First of all, we can’t even say “if A, then B” because “B” has 2 potential outcomes, and even if we could, you can’t logically say that the reason the market moved up was because you got a “buy” signal; the market moved up regardless of what you theorized and had no knowledge or expectation you even exist! In short, they’re 2 mutually exclusive events.
As to the other assumption that B*A = A*B, the reason this doesn’t hold up in trading is that both “B” and “A” are vector fields, and their force on each other very much is a “one way street” in terms of outcomes. Think of “A” as any “buy/sell” signal where momentum is up/down and moving; think of “B” as the force resisting this move of “A”.
Does the “force resisting the momentum” acting on your “buy/sell signal” = your “buy/sell signal” acting on any resistance in the market to a move? Of course not, and the reason is because your buy/sell signal is mutually exclusive of the market and has no effect on it. Therefore, AB≠BA, and if you’re trading a method that automatically assumes that it does … well … how many of you took the time to assess this kind of situation before you plunked money down and started trading using MACD combined with some kind of RSI and got your ass handed to you and can’t figure out why?
As I said yesterday, and above, choose the form of your destruction; if you don’t know what’s killing your trading, how are you supposed to stop it?
The relationship of the volatility algorithm’s signal lines [plum and yellow] on the M1, can be thought of as vector fields; by themselves they aren’t nearly as valuable to us as they are when they are studied as fields of force acting on each other. We place their measurement at the LOWS of the M1, because we are only interested in either maxima or minima as these vector fields change; the median does us no good because the information has too much “noise” in it.
We can measure short term momentum for the day starting with the overnight action [white line], and from that we have a “binary event”; either momentum is positive [market above white line], or market momentum is negative [market below white line]. If it is positive, what we are looking for is a break upward of the inverse Fibonacci Ratio towards the yellow line [cuz plum would always be below yellow], and this pinpoints the moment a shift of momentum is taking place back with the trend of the day. The probability this momentum extends itself for a winning trade is extremely high.
The other side of this binary event is when price is below the white line. The rules here are not the same, and with good reason; gold trades down “asymmetrically” as opposed to it trading “up”, and our path to profits doesn’t look the same as it does when price is above the white line; so why on earth would you trade it the same? If you trade based on some other method [algorithm] other than mine, does your method have the “same” or “different” rules for up/down markets? And if you don’t know or care to find out, you’re giving money away.
Turning to today’s trading in gold … a very muted night session in Asia, with little price action up or down … after getting their asses handed to them, maybe … maybe … [“I know I’m asking for the world here”] … they will stop this insanity of buying every fucking night and figure out they’re getting played like violins by the bullion banks … and it seems like last night Mrs. Watanabe ran out of money.
At the New York open, things look sloppy … I’m definitely not looking to chase this stuff higher on signals … retail sales gets the suckers to buy with an upper exhaustion move at 08:30 … ho hum … an hour into this and it looks and feels like “chump city” … moves down are being met with buying … looks to me like market shorts are covering [or attempting to cover] on breaks, which is a classic commercial, bullion bank M.O. [modus operandi].
Equities weakness [especially the DOW30] fueling gold rally here off the lows … market now at the white horizontal line … if reversal day is in store in gold, it’s important for this rally to back off some and consolidate a while and NOT “shoot the wad” of buying interest too soon, otherwise the bullion banks will step in and crush this stuff yet again … came within a few pennies of a lower exhaustion hit at the bottom … for market to go higher later today, there is the need to “trap” the shorts against the high later, not now… patience & discipline very much required here; waiting for the signals is always the hardest part of trading.
Two and a half hours into this, and this type of market action in gold is typical of short term bottoms; the reasons are 1) no Asian Chucklehead buying starting the day, 2) multiple upper exhaustion moves where the RM=1 hold them very well, and no new high for the day … yet. I need to see an algo signal to get me long; haven’t seen one yet.
3 hours in and it’s drifting lower towards the lows … can’t hold the rallies on short covering most likely due to commercial selling … these guys won’t let up until they start to see serious bids under the market, and then those bids start to “chase” the market … looks and feels like we’re a day or two at least from any attempt higher. So, no trades today.
Ok, well that was a “nothing burger” of a day. Dog and I are outta here. Until tomorrow.
Have a great day everybody!
-vegas
OPEN A DEMO AND/OR LIVE ACCOUNT AT THE LMFX LINK IN THE “DOWNLOAD LINKS” SECTION OF THE WEBSITE TITLED “OPEN TRADING ACCOUNT – DO IT NOW!”