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Wednesday, January 4, 2017

THE NATURE OF TRADING DYNAMICS

RELYING ON CONVENTIONAL MARKET TRADING WISDOM


It’s been a subtle shift; hardly noticeable to the many masses that trade any of the financial markets on the MT4; precious metals, stock indices, or FX. The question to be asked, and I make it not to be rhetorical is, “Has the obsession with Nick Taleb’s ‘Black Swan’ scenario reached the point in the collective trader community to the point where no large moves are possible anymore because large traders are either 1) hedged up, or 2) have made the tail risk option bets that negate the necessity for stops”?

If you’re thinking about any market making a large move [a “black swan” event], then by definition, aren’t you negating the existence of the possible event because you are thinking about it? Black swan’s are supposed to happen when nobody is looking or expecting them; if everybody has purchased out of the money [OTM] puts and/or calls for protection, some times to the tune of 10X their positions so they can effectively “Christmas tree” the trade, and thereby make money even if their underlying assumptions about the original trade are wrong, then somebody explain to me how you get markets to move without some underlying game changing macro hypothesis from one of the various central banks?

And when you get this, which is what USDJPY & gold are in right now, right along with the stock indices where the phenomenon has reached epidemic proportions, the only things left are 1) lower volumes, 2) shrinking volatilities, and 3) a retail spec community that is getting the hell beat out of them because there is almost no follow through with any move. In other words a gigantic stop hunt, and if that’s not the play, then it’s a very swift move by institutions that makes your once profitable position a loser within seconds as the proverbial train leaves the station with you standing on the platform.

Gold especially, due to the fact that retail specs have been killed in this market the last 6 months, are seeing speed of light moves in bids/offers that go can dollars within a bat of your eyelashes; hit the trade button and nobody knows where your fill will be except to say it won’t be pretty. USDJPY is far better, but again what does that mean when you’re up 7 PIPS and 2 seconds later you’re down 7 PIPS? World’s deepest market except when it isn’t … and today especially, the stop hunts on the downside have been very quick … followed by … crickets … rinse & repeat.

What I am seeing and have seen the last 6 months in financial markets really bothers me from a trading standpoint because this type of trading is seemingly becoming the norm, and not the exception … which begs my original question of asking is this what the future looks like going forward? Charts schmarts; candlesticks mandlesticks; throw spaghetti up against a wall and you have about as much chance of discerning what anything means.

For us, and for my trading, it means being more strategic in making trades, specifically paying attention to “half way backs” on ranges, and more importantly liquidating on spikes in price that go your direction, and then not worrying about what comes next. In practically every market, dealer/LP bank manipulation is getting worse, stop hunts [up & down] are getting worse, and slippage from market fills are getting worse, although they have been terrible for some time; we find ourselves in an environment where we are the ones looked at as the “road kill”.

Where things have subtlety changed, is that lack of “order flow” going up & down on what would be considered a “normal day”; volumes are lower because specs & smaller institutions and hedge funds have been burned badly. In all seriousness, I don’t know what a “normal” trading day looks like anymore, nor do I pay much attention anymore to correlations between markets, as quick as it appears it then goes away and disappoints.

The conclusion I have come to over these last months is that you have to make a determination on exactly what kind of trader you are and what primary markets are you trading that fit your style; for obvious risk profile reasons, I am not nor never will be a “position” player; my goal is more short term so that I never have to take anything home overnight. But simply saying “short term” isn’t enough either; do I want to “play” over minutes or do I want to play over the course of the day in terms of maybe 10 -15 minutes on the low side to maybe a few hours if things work out?

With this in mind, most likely this weekend I’ll have an algorithm for the “scalper” mentality; i.e., proper floor trading methods of getting in and out rather quickly [seconds to maybe 3-6 minutes] and then evaluating and beginning again with your PIP goal in mind; the only market I would recommend this in would be USDJPY because of its super low cost to trade with above average volatility. Gold & DOW30 lack the cost structure and spread range and simply are too expensive.

I’ll be calling this the “-vegas USDJPY Scalper Vol Algorithm” and it is designed to take advantage of the stop hunts and disruptive market behavior dealers & LP’s are engaged in on an almost daily basis. If you have a scalper mentality, this is the algorithm for you. I’ll have much more on this tomorrow.

Gold today a trading disaster, as New York is in the process of putting in about a $3.50 range to maybe $4.00 if you’re lucky; given how fast the bid/offer changes, along with slippage, no matter what you do just wait 5 minutes and you’ll be down money. USDJPY a complete stop hunt on the downside with some “rip your face off” rallies right behind the carnage. Using the HR1 and the M1 algorithm, there were plenty of opportunities to take advantage of the rallies, and position yourself again later. Not the easiest of days, but with any patience and discipline, you made money.

It’s a “Chamber of Commerce” beautiful day down here in Paradise; time for the beach … I’m soooooooo outta here … until tomorrow.
 

Have a great day everybody!

-vegas
OPEN A DEMO AND/OR LIVE ACCOUNT [CHOOSE THE “ZERO ACCOUNT”; REFERENCE ID# 6952 WHEN OPENING YOUR ACCOUNT] AT THE LMFX LINK IN THE “DOWNLOAD LINKS” SECTION OF THE WEBSITE TITLED “OPEN TRADING ACCOUNT – DO IT NOW!”
 


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