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Friday, November 11, 2016

HEIGHTENED VOLATILITY & TRADE LIQUIDATIONS

“Newbies, when you trade, where are you?”
The whole point of having a reliable algorithm is to get away from the pic above; having said that, we’re all human and suspending brain activity while trading is next to impossible. And what you soon discover, in times of market  [pick ‘em] turbulence and sky high volatility, is that it’s more of an “art” than it is a science in choosing the right RM for your trading on the M1; but, and this is a very big butt, it’s a problem I want because it means trading opportunities galore.
And while gold has seen a rise in volatility, it isn’t anywhere near the maniac conditions in the U.S. stock indices; both the SP500 & the DOW30 are “off the wall” right now in terms of heightened intraday volatility. And so the big event of the week [U.S. elections] has unleashed the volatility animal and now we are faced in attempting to choose the right RM level for our trading; we don’t want to miss a liquidation, but we don’t want to liquidate and see the stuff rocket another few percentage points either. So, what are our choices here?
As I said yesterday, the first part is having “situational awareness” to events [political or economic] that control a big part of heightened volatility “above & beyond” where it usually is in any market; however, markets cannot remain in RM=3 or RM=4+ very long because the energy needed to keep them there, i.e. the buying and/or selling frenzy that keeps hitting the exhaustion lines at these levels, can’t be sustained. Market history tells us this loud and clear.
Ok, so you realize the RM needs to be higher because you see the events unfolding; to go from the usual RM=1 to RM=4 requires events that are major to the markets in terms of price readjusting itself to the “new” information; right now, there are only a few things that can do this; major economy political elections/resignations/coups/, things of this type, NFP reports, and Central Bank interest rate decisions [most notably the FED]. Other than that, it would take a “one off” [entirely possible given today’s geopolitical environment] to make me move my RM from 1 to 4 before anything happened in the market.
Tuesday night going into Wednesday, especially as market expectations were changing from Trump losing to Trump winning [thank you Florida & Ohio!!], and you could see what was happening, a change to RM=4 was mandatory in gold and DOW30.
Through Wednesday, I stayed in RM=4 [both markets]; Wednesday night I switched to RM=2 [both markets] for Thursday trading, and today I’m going back to RM=1, again in both markets as things have settled down somewhat. Now, that doesn’t mean I’m right, and certainly SHTF can strike at any time; if it does, I’m going to be leaving money on the table by getting out too early, but it’s a problem I would love to have each and every day! “Awwww, looky here Maw, I sold at the RM=1 exhaustion line in the DOW30 and took a 60 point profit, when I could have waited another 2 minutes and sold it at RM=2 90 points higher; come here an gimme a hug cuz I’m so sad!” [Wait … what?] Exactly.
Now, there will be times when volatility is “above average” for above average markets [like now] and you will be in a position and the market will go through the RM=1 level like a lumberjack’s chainsaw goes through a stick of butter; in other words it gaps right through the lines on its way higher and you find yourself sitting there saying to yourself, “Holy profits-O-Plenty Batman, what the fuck just happened?” You got one of 2 choices to make, neither of which is a totally “right or wrong” answer; 1) you can let it ride some [as long as it stays above the red exhaustion line and keeps climbing] which in the past as long time readers know I termed the “Ferrari Gear Shift”, or 2) you can take the extra profit right now this second. Depending on the market and circumstances of the trade, I usually adopt the first choice, but also have used the second when I just want out [like when I completely go way past my profit goal for the day and am content with what I have captured in profit].
As you may have guessed by now, the “dirty little secret” in successful trading is proper entry, followed secondarily by liquidation. Unless you get in a trade at the right time and under the right circumstances, you’re going to discover [usually sooner rather than later] that getting out to make money is a bitch; the market just doesn’t want to go to any level to see you even make $0.01! The algorithm has as it’s 3 priorities, in order of importance for you to be successful and make a career of trading, 1) keep your ass out of trouble, 2) proper trade entry [right as momentum is shifting], and then 3) proper trade liquidation, with the full understanding that when you are up money in a trade you have some latitude in deciding when you get out. Even if you are the world’s worst trader [and boy have I seen some beauties in this category], you still stand to make a fortune from trading while you completely fuck up discretionary liquidations!
What it all boils down to when SHTF is shifting your RM levels, and then when things settle down some go to RM=2 for a few hours to a day, and then go back to RM=1 on day 3, all the while understanding you can employ the “Ferrari Gear Shift” or simply book the extra profit immediately; either way you’re a winner. And that is how I handle these types of scenarios.
We’ve just been through a climatic week in terms of market moves; now that you have had the great fortune to see it “up close & personal” and seen the shifting sands of volatility move beneath your very feet at a speed that can be unbelievable to most of you, my opinion is that my posts now on the subject have far greater meaning to you than if I had done them during an October “sleepy time” in the markets when they had no significance. Welcome to “continuing education” –vegas style!
Turning to gold today … any guess who attempted to take it higher last night? … “Alex, I’ll take ‘Stupid Shit in Gold Trading’ for a $1000 please? … what is the Asian Chuckleheads! … God this game is easy.”
Right as we start, gold is sitting right on top of the daily calculated white horizontal line, and I’d be really careful of the trade today; we already have a $14+ range today, and for a Friday of late that would be a very good range to see for the day; I realize the ranges have been $30+ these last couple of days, but given the price level of gold, that cannot last; it simply can’t, and to actually look for it will utterly disappoint you.
Near the open here in New York, I’m seeing a very slight upward bias in price; hard to tell if it’s position squaring ahead of the weekend or specifically short covering from the highs in Asia earlier today; I don’t think it’s outright buying from retail specs. One thing worth noting here, though; the DOW30 & the SP500 “should” [and that doesn’t mean “will”] have some sort of “profit taking” [CNBC talk here] coming up real soon, and that should spell gold strength. The question is will it generate a buy signal from the algorithm with the market above the white line? We’ll see.
Ok, first trade of the day directly below.
Because we were above the white line, I gave the trade a little extra room, and liquidated on a breach of the first M1 low after the spike rally up; in hindsight it would have been better to treat this trade as if it were below the white line, buy hey … in the scheme of things not too much missed profit. Still made about $0.80 on the trade versus maybe a $1.25 if I had done it that way.
Trade #2 happens pretty quickly; but again, after just having missed the top in trade #1 and being reminded not to get to greedy on these long trades, when this second trade starts stalling I’m getting the feeling it doesn’t have much room on the upside, so I liquidated right here for about another $0.70 profit.
Well, that escalated quickly! Trade #3 directly below.
Ok, this is what I wanted to see; captured about $2.50 on this trade, so with the 2 earlier trades I’m now at about $4.
However, the trade is looking and feeling very sloppy; if gold were going higher, these 3 signals [taken together] should have produced a stronger rally than 3-4 minutes and a bigger move in price. What this tells me is that there are sellers above the market waiting for any rally to sell, and what I want to see to get me in another trade is a waterfall to the lower exhaustion lines; nothing else.
Well, again, that escalated quickly! But, before I post the chart for trade #4, remember what I said yesterday about “situational awareness”; you have to know there are/were stops below 1250 [basically Wednesday morning’s low from the panic down], and where would the position playing retail spec community have their sell stops parked like a pack of lemmings? [I’ve written before about knowing where stops are “packed”.] Why of course, right below that. And so, if you bought at 1250, you got a surprise didn’t you; it’s because you weren’t aware like I asked you to be yesterday. “This isn’t rocket science unless you want to make it that way; have ‘situational awareness’ and follow the algorithm, and trading life is simple.” The 4th and final gold trade of the day for me directly below.
Getting in, I waited for them to clean out the position players from Wednesday’s low; when the M1 ended at or near the low, and the next M1 went green, it was pretty much a given the pressure was over for the time being. And on the subsequent rally, when that M1 turned red I was gone [where the orange arrow is]. Ok, adios gold, you’re a psychotic mess today. But, the gold algo “nails” it again today, and that’s all that matters!! [And that last trade captured about $3, making the total easily over $6 for the day.]
[And what you are seeing now in gold in the 1230’s, and going into the 1220’s is utter, complete capitulation by the position playing longs from Wednesday; the specter of higher interest rates from a booming economy under Trump the reason behind the gloom & doom before the weekend ( a December rate hike a “lock” in my opinion); and the commercial sellers know they got the “bull by the balls” and are squeezing hard as we head towards the close; it’s going to be hard as hell to rally this stuff today anything more than a couple of bucks unless we see stocks crater.] In any event, no matter where we go from here the rest of the day, they’re going to do it without me; trades locked up, money in the bank, life is good. [And man are they beating the hell out of this stuff! “This selloff won’t stop until the Asians sell it lower; when that happens is the only way New York will rally; remember, you heard it here first.”] And from purely an algorithm standpoint, we got 4 exhaustion hits lower followed by rallies, that when they stalled you should be out! If not, why not? And after the first one, you should have known to raise the RM level to RM=2 given the volatility. Again, what have I been talking about these last days in terms of “situational awareness” and how to spot volatility changes?
Before I finish today’s post I want to bring up 2 things that may have significance for you in terms of trading these markets and your choices going forward; 1) because LMFX has gotten a new LP in the SP500 [0.40 index point spread, $2 round turn commission, ±$10 per index point per 1 lot CFD, $200 margin per 1 lot as I write, and a net trading cost of 0.41 index points], this market is now on a “par” with the DOW30 in terms of “tradability”; therefore, I’ll be releasing the algorithm for this market probably next weekend, and 2) LMFX has the most volatile and widely traded U.S. equities available for trade as CFD’s; most notably Google and Amazon, both $700+ per share stocks that have wide ranges during the trading day; I’ll be making these 2 stocks part of the “mix” of our markets that I have algorithms for because they are A) part of the DOW30, and B) trading opportunities abound in buying/selling them, and 3) the margin for trading them is 10% the price per share which is far less than trading these stocks with full 100% cash at any mainstream brokerage house in the U.S., or anywhere else for that matter. And, of course, since you are trading at an “offshore” brokerage house, there are no legal requirements for LMFX to report anything to anybody as to your activity or whether you made or lost money. I’ll have more on these 2 markets, especially the shares, next week sometime as I finish their respective algorithms.
This will “round out the list” of markets I’ll be covering and/or making comments in the posts going forward; this will give us gold, 3 stock indices, crude oil, and 2 high flying popular stocks; if it isn’t happening in any of these markets, it’s not happening anywhere else either. And again, those of you looking for an FX market [currencies], it’s not happening anytime soon because of the disparate nature this asset class has devolved into over the last year to year and a half; it’s simply untradeable and unless you have the will to become a meth addict and stay up and glued to your screen 24/5, you will miss the action somewhere for the day, be disappointed and dejected, and then see no follow through anywhere for days as it “chops” around and retail specs get stop hunted without mercy. Overall trade volumes have collapsed in the major pairs, thus making liquidity and slippage a real issue as major players have left the trading scene leaving banks versus retail traders; “Gee, lemme think for a minute who will win this game?”
Time for the weekend, and quite frankly I’m ready for it; got a lot of work to do yet with the DOW30 algorithm manual, so I can get it up on the website by Sunday night. The dog and I are sooooo outta here … until Monday.
Have a great weekend 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!”
 

 


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