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Tuesday, February 28, 2017

DISSECTING USDJPY

“One of the very few ‘free’ markets remaining.”

Over the course of the last 10 years, since the start of the financial crisis in 2008, an amazing transformation has taken place in the financial trading world. From the early to mid 1990’s up to 2007 – 2008, Japan suffered through what was known as the “lost decades”; and while their interest rates have been low to near zero ever since then, USDJPY became the currency carry trade of the world and was sold to pile into Pounds, Aussie Dollars, Kiwi Dollars, and anything else that had a positive interest rate. For years, Mrs. Wantanabe smiled with glee as she sold and borrowed away Yen [that paid nothing] and raked in the cash from interest on much higher yielding currencies.

That all ended in 2008, as world interest rates crashed, and the Yen “carry trade” collapsed. Since then, though, and here is the ironic part, as all other markets have been taken over by the manipulators in some shape or form, USDJPY has morphed into an asset class unto itself, and when the Yen rallies strongly the “talking heads” refer to it as a “safe haven” trade. “Wait … what?” “A country with one of the world’s highest debt loads, no GDP growth for decades, an aging population, and a birth/death ratio well below 1.0, and this place is a safe haven for cash”? Don’t get me wrong, Japan is a great place, but a safe haven it ain’t.

What’s at play here, I think, is that Japan is safe from the manipulators; believe me, the FED, BOJ, SNB, IMF, and all the other alphabet soup central banks, along with their “Plunge Protection Teams” can keep stock prices through the various indices artificially high, can keep a lid on gold prices, can manipulate copper and other physical commodities, but cannot control USDJPY. And so, what we now see is a market that attracts all of the “hot” money the world has to offer, and along with corporate flow and capital flow from financial institutions worldwide, this is probably the last “anything close” to free market left in the world.

And this goes to the heart of what I mentioned yesterday, which is that USDJPY has the best spread, lowest commissions, and best liquidity [except when there isn’t any] of any market traded; gold, not so much by comparison. So while gold is stuck between a $3 HVALUE, what with the “bullion wall” standing strong above 1255, USDJPY today is almost … almost … back to normal trading conditions with an early NY range of about 80 PIPS. “So, how come gold doesn’t have an $8 range”? [Hint: See previous sentence about “bullion wall”.]

Today is a strange “event risk” day; leaks, more leaks, and outright rumor lies expected to be hitting the market as the day progresses, all with the express purpose of being “the definitive” outline of President Trump’s speech tonight to get you to do something you don’t want to do; namely, sell the breaks lower and buy the rally highs. Today especially, you have to be careful of the “other shoe to drop” syndrome I mentioned yesterday; cuz even if you are up in a position by being long near the bottom or short near the top, while that stop that looks “safe” one second it’s getting filled a millisecond later at a price you didn’t have any idea was in play. You planned on risking X, you got Y instead.

Just after the NY open in stocks, we got a “downdraft” in USDJPY [how many more like this?], and the low for the day candlestick [so far] put in a reversal and a bullish engulfing pattern, from which the market has put in a small rally. If I took this trade and got long I make a few PIPS; if I take this trade and the stops sub 112 get taken out, I potentially get filled 20 – 30 PIPS away from my stop either on or near the bottom. Given the fact the day should be “choppy” up/down as traders adjust positions before the speech tonight, how do I even come close to making this back if it happens? It would be a great place to liquidate and cover a short position obviously, but not a very good risk/reward proposition for getting long. And as morning turns into afternoon, I’m definitely looking for trading conditions to worsen; price more muted, followed by spikes, then rinse & repeat until tonight.

From a trading perspective, I am very hesitant to take a short position below 112.10 in today’s U.S. session; sure, there are stops below, but who is going to want to “bully” this stuff lower before tonight? And even if somebody puts the screws to USDJPY, what’s to say the stops get hit off and run like you want? Now what, when it starts to rally … where does it end on the up side in a market that’s seen the selling pressure go away?

Once today is over, and we can get into a more normal trading cycle, I will increase my volumes and attempt to “position scale” trading positions. My volumes have been very light [both in gold & USDJPY], due to the spike risk coming from the political spectrum; that will subside after tonight and the market will take its cue and go from there.

Earlier this morning I did one short trade off of a bearish engulfing pattern, and on the dive lower covered for profit. Overall, I was very pleased with my fills, especially my short liquidation buy which was filled a couple tenths of a PIP off of the low spike down; if I was in gold, there’s no way I get anywhere near this, so given equal market circumstances in terms of range and price moves, USDJPY is far superior.

As I write, USDJPY is slowly drifting lower, below 112; as I said, I don’t trust this move [yet]. At some point, shorts need to cover or else they risk going exposed into tonight’s speech at prices that could become a real problem. From the looks of the way this market is trading right now, it very much feels like the trade thinks Trump’s speech will be long rhetoric and short specifics, which is very much Dollar bearish, and if true, will more than likely see the 110 handle in USDJPY shortly. Having said that, though, never underestimate Trump from the surprise side of the equation; he lays out an aggressive agenda with some detail and see how fast USDJPY hits the 113 handle. So, there is a lot of risk in the market right now due to this uncertainty, and that makes me suspicious of being short from sub 112.10, cuz I don’t think the support area around 111.60 is going to be breached until at least during or after his speech. Which leaves shorts in the uncomfortable position of watching the clock tick down as dealers [at some point] start bidding the pair higher; cuz if USDJPY gets back over 112.25, it has the potential of being a repeat of the melt up we saw yesterday. “Who says lightening can’t hit twice in the same place 2 days in a row”?

And checking to see what USDJPY is doing while I write, here comes a 2 minute candlestick, 28 PIP landmine that blows short positions up; “gee, who coulda seen this coming”? And, again, this goes to the heart of my argument about “risk event” days; whether they are central bank interest rate decision days, election days, referendum days, NFP Friday’s, or something else, “event risk” skews decision making to the point of making trading on a par with sailing with Columbus to the New World in 1492; good luck with that.

For my part, I was very much cognizant of the risks today, and knew that the “early” trades [before New York stocks opened up and the Trump clock started ticking down to tonight] would be the least risky [in terms of spikes] and the ones I wanted to make. I really only had one good chance from the signals and maximized time in the trade versus profit gained to our advantage. Now we can leave this mess of politicized trading [hopefully] and get on with making money in earnest. I’ll be at the screen tonight, and it should be interesting to say the least to see what unfolds; if history is any guide, it won’t have much in the way of details that is going to unleash massive buying of Dollars, but with Trump one never knows what to expect.

PAMM/MAM spreadsheet directly below … I’m outta here … until tomorrow.
 

[click to enlarge]



Have a great day everybody!
-vegas
OUR ‘TURNKEY FOREX’  PAMM/MAM  IS NOW OPEN AND OPERATIONAL; SEE “PAMM/MAM MANAGED MONEY PROGRAM” IN “DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND START YOUR JOURNEY FROM WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!

  

Monday, February 27, 2017

HURRY UP & WAIT [AGAIN]

“What’s more fun than waiting for HVALUES to go up?”

“Oh goody … it’s an hour from the NY gold open and we’re 57 cents from Sunday night’s open, with a whopping HVALUE currently at $3.17 … USDJPY all but comatose as well … neither market coming as yet close to their respective minimum HVALUES for the day [from the Asian session and early Europe] to trade [$5 for gold; 40 PIPS for USDJPY] … welcome to part of the ‘new’ normal”.

Since the start of 2017, almost like somebody flipping a light switch to the “off” position, the gaggle of traders who make up the Asian session have gone completely off the grid when it comes to bidding gold higher. Except for a couple of days, most of the last 8 weeks has seen zero action; have these guys/gals wised up or is there something else in play here I’m not seeing? … some economic reports due out at 09:30 NY time; are the markets waiting for fantasy numbers now? … in order to get anything to move, do we now need to wait for North Korean coal production last month too? … I’m sitting here wondering about the traders who are attempting to trade gold with $0.35 - $0.60 + spreads [and in some cases RT commissions to boot] and asking myself how they are not going completely insane watching a market that hasn’t gotten out of the spread for over 10 hours … maybe everything is collapsing into a singularity with President Trump’s State of the Union address tomorrow night, and appetite for risk ahead of this is at or near zero … and then [good or bad, bullish or bearish] the explosion in markets one way or the other … “tail risk” here a distinct possibility.

Well, an hour into this manic “lovefest” and we’re lookin’ at … crickets. Nothing new here, as we’ve seen this about a thousand times since the New Year started … I want to emphasize again how important these USDJPY & XAUUSD thresholds for trading are; the statistics on this are mind blowing, in that when these 2 markets can’t achieve an HVALUE for the day higher than the threshold, the profit ratio [PR = HVALUE / LVALUE] is in the “1’s”, and when these 2 markets trade above their respective thresholds, the PR = 4.3+; this is a huge difference. So while I don’t like sitting here any more than you like sitting in the dentist’s office, it is very much to our advantage to wait. The other reason we wait is because of “signal noise”; when PR’s aren’t very high, there is a much higher probability any “signal” we get isn’t going anywhere. Now what?

I got to admit, coming into today I thought USDJPY was going to be the “mover”; bunch of reasons, none of which is really important, but instead easing European election “tensions” [meaning, according to the MSM in Europe, when people stand up and want more freedom from EU Apparatchiks that is defined as “tension”] has made EURJPY the big mover today to the upside while USDJPY stays very quiet … “hmm, somebody in Europe forgot to send me the email telling me of this (snark)”.

And once again, at 10 NY time, traders get a lesson in “tight ranges”, along with an advanced course in “stops” from a Reuters report on something President Trump reportedly said RE infrastructure spending & taxes; and this is exactly what I was referring to above about thresholds and tight HVALUES DURING THE TRADING DAY, NO MATTER WHEN YOU COME TO TRADE. Ignore the thresholds, and you are begging for pain; the stats over the years and decades, both in USDJPY & XAUUSD, are clear as Caribbean ocean water. Until you reach the $5 threshold in gold, and the 40 PIP threshold in USDJPY, your risk is 5 TIMES GREATER YOU WILL SEE A REVERSAL IN PRICE THAT TAKES OUT THE OTHER SIDE [and then promptly goes nowhere]. In addition, in gold over the years since it’s been above $1000 per OZ., once the threshold of a $5 HVALUE has been achieved, there is less than a 20% probability the market reverses on that day. So, like I said, ignore these probability stats at your peril. If you allow yourself to get caught up in them, they have the potential to be some of the most painful trading days you can imagine, as you sell the low X times and buy the high Y times looking for some kind of breakout.

In general for both markets, this happens about 15% of all trading days; usually they will “cluster” either around Holidays [Easter, Chirstmas, etc.] or around large event risks [elections, NFP reports, and/or central bank interest rate decisions]. It’s been a while since we’ve seen any, so I’m more inclined to think today and possibly tomorrow could be impacted due to the State of the Union address and the possible event risk it could unleash if the “tone” of the event turns a bit ugly [understatement]; and for that reason alone, “tail risk” in gold and USDJPY is higher than it usually would be after the runs they have had, not to say anything about U.S. stocks, which are so overbought it borders on insanity. So, we could very well be in 2 days of below threshold markets; maybe, maybe not, we’ll see.

I want to mention 2 tangential points from yesterday’s special weekend blog post; 1) the various markets that are available to us, and 2) the nature of the buy/sell signals.

I’m going to tackle the second point first; it’s far easier to identify engulfing patterns [bullish or bearish] and reversals in price from a top/bottom than it is to remember the math behind them [fractals, stochastic momentum, and probability theory]; and, even in slower markets the signals will produce profitable results, especially considering we are buying breaks [at/near/ or over the yellow line] and selling rallies [at/near/ or over the plum line]. You don’t have to be perfect, all you have to be is “close” [general area] to the lines, wait for a move to happen first, and then wait for the pattern.

As to my first point, trading through Turnkey has opened up many FX pairs where the “net” cost to trade them is significantly below 1 PIP; while Europe is open and the U.S. follows shortly, even GBPJPY has a “net” cost around 0.6 – 0.7 PIPS, which is remarkable when you consider 10 years ago Saxo Bank had the best spread on the planet at 6.5 PIPS! So, the door opens for you, if you desire to trade other pairs,  to use the version 3 algorithm on FX pairs where the “net” cost to trade is below 1 PIP [2nd digit price for 3 decimal pairs, and 4th digit price for 5 digit pairs].

OK, shortly before lunch hour in NY, gold finally sees somebody panic buy the market shoving the HVALUE above $5; can it do anything now, or is this just a stop hunt for a large resting order that was above the market? USDJPY is still struggling to find its legs lower to get to 40 PIPS, and while I’m not asking the 2 markets to correlate “tick-for-tick”, I don’t have much confidence in the gold move other than as a suckers play, up/until/when USDJPY decides to start moving lower and get an HVALUE of greater than 40 PIPS.

Keeping yesterday’s special blog post in mind, and even though we had no buy signals in gold today due to a restricted HVALUE until about Noon NY time, let’s assume there was in fact a buy signal earlier; market rallied up to the SDEV [plum  line] & the old RM=1 exhaustion line [dashed aqua line] which would have meant liquidation. However, above this, were there any sell signals after this up move near the top? The chart from today directly below.
 


There were 2 bearish engulfing patterns that developed; and after the 2nd one, the algo’s took the hint and sold the market off quickly. My point in bringing this up is to prove to you via example just how powerful these engulfing & reversal patterns are at tops/bottoms after moves have taken place, and even in this “dead” market price sold off rather fast. [Note: Just because I want to exit a long and liquidate, doesn’t mean I want to be short. As I have said before, you have to be very careful about being short near the high of the day and long near the low of the day after the market has congested and gone back and forth some; you open yourself up and risk a large spike against you that can fill a stop far away from where you intended, and therefore the risk/reward isn’t worth it.] The computer driven algo’s did the math and then sold; if we were in this we could have seen it coming seconds before the algo’s hit the market. That’s why I said yesterday, we’re smarter than the damn computers.

Ok, here we are in early afternoon NY time, and I’m calling it quits for the day in both gold & USDJPY having made no trades today; Yen never did reach its threshold 40 PIPS HVALUE [31 PIPS as I write] for trading, and outside of a buy stop order [don’t know for sure but guessing] in gold that got ripped $3 in less than a minute, it wouldn’t have made its threshold either. Trading action in both pretty terrible, but gold definitely the worst by comparison.

Just to give you a “heads up”, tomorrow I’ll be trading USDJPY [assuming it hits its 40+ PIP threshold overnight], as the trading action has a more “normal” flow to it than gold; right now, today’s gold trade flow is as bad as I have ever seen it, and it’s hard for me to see how it could possibly get any worse. The entire trade day encapsulated in about 3 M1’s, and after that complete and utter … crickets. Considering what transpired today and what’s likely to happen tomorrow, USDJPY is the better trade choice by far. To give you an idea how bad today was, directly below the Daily candlestick in USDJPY with Ichimoku cloud formation & the plum/yellow ± 3 SDEV; today was almost as bad as the 2 hour Sunday session before it. The daily candlestick looks like a pencil “smudge” compared to recent days and weeks; all in all, a day to avoid.


The best trade of the day was not doing “stupid poo poo”. I’m outta here. And just before I finish and head off, USDJPY explodes up and takes out the 112.50 area stops [and lurches gold downward], filling the lucky buy stops around the 112.65 – 70 area and expanding its HVALUE above 40 PIPS. Great, where were you 5-7 hours ago when we had some time? Now, here just about an hour before things wind down in gold & FX for the day and prices go “sleepy time”, you “reversal day” this in USDJPY and clean out stops; meanwhile, all those “lucky” buyers in gold get to panic before the close because they got nowhere to go and are getting “zilch” help from USDJPY.

And if you’re sitting there reading this and wondering how all this can happen and what’s the reason for it, I can explain it simply in one sentence. “This is the kind of stuff that ‘happens’ when Asia & Europe do nothing and everything is left up to the dealer banks in New York; more often than not, somebody is going to get trapped into the afternoon close and be forced to puke positions they don’t want”. It’s as simple as that; and of course, once the stops are “run”, it’s back to … crickets.

End of day PAMM/MAM spreadsheet directly below.

[click to enlarge all tables, charts, & pics]


Have a great day everybody!
-vegas
OUR ‘TURNKEY FOREX’  PAMM/MAM  IS NOW OPEN AND OPERATIONAL; SEE “PAMM/MAM MANAGED MONEY PROGRAM” IN “DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND START YOUR JOURNEY FROM WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!
 




 

  
 

Sunday, February 26, 2017

SPECIAL WEEKEND UPDATE: VOLATILITY ALGORITHM VERSION 3


“An endlessly repeating fractal; just like any market.”

Up until recently, and I mean recently the last 2 years of trading [roughly from the EURCHF debacle in January 2015 to the present], my algorithm model worked almost perfectly in markets that modeled “normal” market behavior. “Normal” defined as market price action that spanned the range from slightly less than average intraday volatility to bat excrement crazy; whether it was gold and/or USDJPY [or even EURJPY, GBPUSD, EURGBP, & SP500; I include these last 4 because we now have an “exchange floor” net trading cost structure that supports trading these markets.], the algorithm did an excellent job of modeling market behavior. There’s only one problem.



That problem is that the algorithm models a specific set of the trading universe of conditions, and doesn’t model correctly or accurately the entire population of market conditions that can and will show up in trading; it is therefore “static” when it needs to be “dynamic”, not just in parts, but in its entire structure so that we can capture market moves under ANY CONDITIONS. So, the obvious question becomes, how do I do that?



What we have witnessed in trading these last 2 years is nothing short of an evolution in trading, where as I have commented numerous times on this blog post, an evolution from what used to be “normal” to what is now today and most likely well into the future will be considered “normal”; and that “normal” is speed of light trading [SLT] followed by … crickets; rinse, repeat all day every day. SLT is not generated by a bunch of “Ma & Pa’s” sitting out in Des Moines, Iowa all of a sudden deciding it’s time to buy 1,000 Oz. of XAUUSD from a London bullion dealer; it’s of course, computer driven HFT’s [High Frequency Trading] that hit the market and drive prices quickly and sometimes violently. The M.O. [modus operandi] isn’t to allow anybody on the proverbial train as it’s leaving the station, and thus you can expect no pull backs in price to allow your trading method [no matter what it is] to participate until it’s over and everybody on the wrong side of the market is holding the bag; you’re either on the train or not, and so the question arises, “what is it that HFT’s see [via their computer code] that makes them buy/sell with abandon that can assure them [with a very high probability] profits from their activities; and more importantly, how can we spot it first before the algo’s kick in and position ourselves correctly to take advantage of the algo’s?


So, these are the two $64,000 questions that need to be addressed and solved; 1) making my volatility algorithm more dynamic in scope and not just a “special case” of a market condition, and 2) understanding what it is that the vast majority of the HFT algo’s “look for” in their millions of lines of computer code and front running the front runners!

Everybody here knows that Gann’s ‘Square of Nine’ is useful when measuring what he called the “squaring of price & time”; on it’s simplest level, it can measure price and time in a linear fashion and does a fabulous job of showing anybody the cycle at play from a move that unfolded in the past; the problem is that it has no predictive value since you have no idea on the ‘Square of Nine’ where any move will originate or go towards. It shows you a “cycle” occurred and that “cycles” are ever present in the marketplace for each and every market. Any move can just as easily take you out a level or go in a level in terms of either price or time, and any attempt to extrapolate the last move with the next one isn’t going to be accurate.

However, what I see on the ‘Square of Nine’ isn’t just a bunch of seemingly random numbers; the beautiful thing about mathematics is its abstract nature to be able to project ideas and thoughts into a coherent message, that through other branches of mathematics have meaning and significance far beyond what is possible at the moment. For example, long before computers were even a dream, George Boole invented and created “Boolean Algebra” in the 19th century; it’s the basis and logic of computer circuits and allows your computer to operate the way it does and produce the results you want from software. Similarly, Thomas Bayes is generally credited with creating conditional probability and statistics, long before anybody had any idea what a “standard deviation” [SDEV] was or why it had any significance to anything of value in the real world.

My point is this; I can use the ‘Square of Nine’ for standard deviations [SDEV] and make my algorithm even more powerful because it will cover and map all market moves, not just the ones that go to the present RM=1 exhaustion lines. In other words, I cover all exhaustion events, not just special ones.

From the candlestick chart on gold, I take the “envelope” from the indicators list and make it the following:
 
[click to enlarge all pics, charts, & tables]



Note that 1) the time “period” is 7 minutes, 2) the “MA Method” is simple, 3) “apply to” (median price[HL/2]), and 4) “deviation” is 0.17%. All of these settings are set to calculate a 3 SDEV move from the mean [7] of M1’s to generate a “normal” probability distribution where 99.7% of all 7 minute periods [reflected in the current real time price] are above the lower threshold [yellow] and below the upper threshold [plum].

If I take this envelope and place it on the gold chart, and make the present algorithm lines “dashed” [aqua & red = RM=1], the chart below shows what happened on February 21, 2017 as price rocketed up to the upper exhaustion line RM=1. 




For calculating the SDEV settings “Envelope” in gold [XAUUSD], I used the time periods from 12:00 – 20:00 Turnkey server time, and looked at 6,720 M1’s of 7 minute duration to insure greater than 99.999% probability that the sample size is representative of the entire population of millions of data sets of 7 M1’s. During this time, 41 times market price either went above the plum line [sell] or below the yellow line [buy]; that means that 99.53% of all 7 M1 periods will be between the plum & yellow lines, and that the lines accurately measure [as well as MT4 can measure them given the math limitations] prices within ± 3 SDEV from the mean 7 M1 price.


Here is the envelope for USDJPY directly below. 






For calculating the SDEV settings “Envelope” in USDJPY, I used the entire trading day from 0:00 – 23:59 Turnkey server time, and looked at 20,160 M1’s of 7 minute duration to insure greater than 99.999% probability that the sample size is representative of the entire population of millions of data sets of 7 M1’s. During this time, 98 times market price either went above the plum line [sell] or below the yellow line [buy]; that means that 99.52% of all 7 M1 periods will be between the plum & yellow lines, and that the lines accurately measure [as well as MT4 can measure them given the math limitations] prices within ± 3 SDEV from the mean 7 M1 price.

For brevity, I will omit the USDJPY chart, as well as the other 4 pairs I mentioned above when I started. Sometime during this week, I’ll have the envelopes of standard deviations for these other markets if you wish to trade them.

Looking at the gold chart from above, one thing should stand out to you; that is, when the market starts going rapidly up/down, the SDEV lines [yellow & plum] very quickly approach the RM=1 exhaustion values from the volatility algorithm model. This proves my point that the volatility algorithm in its current form is a “special situation” of a more general volatility model based on SDEV that is more accurate in its scope of market conditions; the former is a “one off”, the latter can handle all conditions!

Ok, now that I got that settled, time to tackle the HFT’s and what their computer code “looks for”. I know with absolute certainty, the “Quants” [PH.D. math & computer scientists that collaborate and fill up entire secret floors in non-descript suburban buildings and that are kept top secret who run, maintain, and execute the algo’s] are banking on 3 critical criteria; 1) stochastic momentum, 2) extremely high pattern recognition, and 3) trapping as many traders as possible and setting off stops so they can exit longs near the top and shorts near the bottom. In other words, outside of certain momentum methods that need time incorporated into them, price is the criteria NOT time.

Most, if not all Quants, are employed [large hedge funds, large investment banker types, and/or HFT firms] under the strictest secrecy and penalty terms you can imagine; and if they ever catch you “talking shop” with somebody outside the firm who has “no need to know” your donkey is in big trouble. These guys are more “hush hush” than CIA & NSA operatives, and guard information & computer code worth billions of dollars to their firms. So, it’s not like you can call them up on the phone and chat with them, now can you?

However, while we may not have nanosecond connections to institutional trading platforms, or direct links to a bullion house, we got the same charts and access to them as anybody else, and I have the same ability as they do to spot “pattern recognition” and its significance to trading.

There are 2 candlestick chart patterns on the M1, AFTER A MOVE DOWN OR AFTER A MOVE UP [NOT IN BETWEEN], that have extreme significance to Quants and the higher math they use in their algo’s; while fractal combinations and computations play a key role in the computer code calculations, when they are combined with these 2 chart patterns, they have a very, very high probability of success of profit; the key is spotting it before they do and acting on it before they “hit the market”.

The 2 patterns are 1) reversal pattern after a short term move to a high/low, and 2) bullish engulfing pattern after a move down or bearish engulfing pattern after a move up. If you don’t know what these are, Google them under “Japanese Candlestick Patterns” and you’ll get plenty of information to bring you up to speed.

Putting this all together, the new volatility algorithm utilizes both SDEVS & pattern recognition to spot and trade very high probability profitable trades, just like the HFT’s do; only we do it quicker and faster because we are smarter than a computer. How’s that?

Computers execute code in a linear fashion and do EXACTLY WHAT THEY ARE TOLD TO DO BY THE MATH OR MATH LOGIC; NOTHING MORE, NOTHING LESS. Computers don’t have the ability to “think”; they wait for the code to tell them to place the trade based on preset parameters and then they execute the algo. We on the other hand, can plan, see the setup, and be ready to act a hair earlier [1 – 15 seconds] than they can.

STEP 1.
[Note: Use this same procedure for USDJPY, EURUSD, GBPUSD, EURGBP, EURJPY, & SP500 if you are going to be trading those markets. I’ll have “Envelope” values for the last 4 markets listed here sometime this week in a blog post.]

Put the “Envelope” indicator on your chart [go up top to “Insert” > “Indicators” > “Envelopes” and click]. Place the values from above for gold into the fields and finish.

Step 2.
Create a 60 minute SMA [any color but I use white] for reference purposes; this SMA [Simple Moving Average} will give you a point of reference during your trading day as to the most current floating value of where HR1 momentum is at in real time; obviously, the slope of this line [positive or negative] tells us if momentum is generally positive or negative. It also acts as a pretty good “mean reversion” point for prices to revert back to at some point.

Go up top to “Insert” > “Indicators” > “Trend” > Moving Average” and click. Use the values for all markets in the box below.


STEP 3. [OPTIONAL]
If you would like the volatility algo with the RM=1 exhaustion lines for reference, place the mq4 file onto the chart and make the aqua & red exhaustion lines “dashed”. What you are going to discover are 2 things; 1) they move exactly the same, and 2) when gold has an exhaustion move lasting more than a few minutes, the lines between the SDEV and the exhaustion lines converge to the same point; in other words, the exhaustion lines are but one subset of the SDEV lines!

STEP 4.
Create your M1 gold candlestick and have at least the “envelope” and 60 SMA on it, and if you want the old volatility algo on your chart for the exhaustion lines, go ahead and add them; otherwise, just leave it off cuz they aren’t needed anymore due to the fact the SDEV lines will be right there when needed.

What we are looking for in gold to initiate buy positions is, 1) price to move anywhere near the bottom yellow SDEV line and/or penetrate it, 2) WAIT for either the bullish engulfing pattern or price reversal on the M1, and MOST IMPORTANTLY 3) anywhere from 10 seconds in, to the new M1 that is about to come onto your screen and cement either the bullish engulfing pattern or reversal as in fact on the M1 chart, you buy right before the current M1 changes into the new M1 and we end up front running the algo’s that will arrive shortly [not all the time, but plenty of times]. These moves down will generally be of greater significance in price than short term retracements inside an up move, and there is more profit potential on the upside to them.

Initiating sell positions is a little different, in that I’m only interested in being short if gold is lower on the day from the previous trading day close; this is easy enough to remember, or if you want make a note and place it next to you as you trade, or just check the daily candlestick. With that in mind, what we are looking for in gold to initiate sell positions is, 1) price to move anywhere near the top plum SDEV line and/or penetrate it, 2) WAIT for either the bearish engulfing pattern or price reversal on the M1, and MOST IMPORTANTLY 3) anywhere from 10 seconds in, to the new M1 that is about to come onto your screen and cement either the bearish engulfing pattern or reversal as in fact on the M1 chart, you sell right before the current M1 changes into the new M1 and we end up front running the algo’s that will arrive shortly [not all the time, but plenty of times].

Stops for both are on the other side of the engulfing pattern or price reversal.

The key developments here, over and above the previous volatility algorithm that I have been using in trading, are twofold; 1) the SDEV lines [plum & yellow] are like lines in the sand, which by definition cannot be breached but by about fractions of a percent of the time, but are not signal lines in the sense of making a trade, and 2) waiting for the proper pattern recognition to initiate a trade seconds before because I know these price patterns set off “bells & whistles” at every HFT, hedge fund, bullion bank, & LP dealer on the planet. And, those sounds you here will be for the direction we want the market to go for profit.

Not every bottom/top near, at, or exceeding the SDEV lines will see the necessary engulfing pattern or reversal; some will go a short price distance and others will go multiple $$ / Oz., but very few will fail. USDJPY PUTS THESE PATTERNS IN CONSTANTLY AT TOPS AND BOTTOMS RIGHT ALONG WITH GOLD.

From a risk profile point of view, what I don’t want to see in gold [or USDJPY for that matter either] at the bottom yellow SDEV line is what I call the “other shoe to drop” syndrome; “market price comes very close/ hits / or exceeds the yellow SDEV line, and then trades sideways for 2 – 5 minutes and then proceeds to plunge to a lower price and hit the new yellow SDEV lower in price, and thus if I get caught in this I end up selling into a falling market which we all know in gold means disaster.

All the lines mean is that the market is very extended and needs to either bounce or work off the selling pressure by going sideways, before then deciding whether to continue lower or work higher. To get the market on our side [HFT’s and others above], momentum has to change quickly; “for me, it doesn’t matter what a particular hedge fund or HFT Quant uses for their ‘top secret’ momentum code, cuz I know that no matter what it is, an engulfing pattern or price reversal [or both] will set it off once cemented on the M1 chart. Directly below, are 4 examples of reversals and engulfing patterns so you can see what I mean visually.



Now, looking at these, it should become obvious that if I took these trades a few seconds before the M1 closed, I’m beating the algo’s to the punch in most instances, and can decide once in the trade and up profits what to do with it and where to liquidate from a position of strength.



That’s not to say, that when price hits / exceeds / or comes close to the SDEV lines it doesn’t immediately turn around and move and would have been a profitable trade; it does that. But it also goes up/down “hugging” the SDEV line [yellow or plum] as it goes, thus exposing you to the “From the sky above, I’m a professional knife catcher”! … “Hey, where are all your fingers”? So to prevent this, we wait for the market, through price action, to tell us and give us the highest probability trade through pattern recognition, and knowing that all over the world computer code is “smoking” at the close of the M1 to get into the market in our direction, and at the same time having low risk and a rather tight stop below the engulfing or reversal pattern. In other words, it’s not about picking tops and bottoms; it’s about buying into the concept of “buying at 1 and selling at 3”.



Too be sure, while the look and feel of the trade may seem to some as radically different in approach than before, in reality all I have done is gone from a “special situation” where above average volatility “behaves” in what was construed as “normal” trade flow to one where ALL TRADING CONDITIONS MUST OPERATE AND BE DEFINED IF THERE IS A MARKET. The former [let’s call it “A”] is nothing more than a “singularity” of the latter [let’s call it “B”]; so, while A = B, it doesn’t mean B = A. In fact, as market conditions have shown since the start of 2015, when conditions started to change [normal to “speed of light … crickets”], the volatility algorithm started to fail as we moved into newer, far more treacherous conditions.


It would be easy, if you knew going into anything trading related what the limitations were of your model or algorithm; unfortunately, as Kurt Gödel proved 86 years ago, we can never know this with certainty. All we can ever do is attempt to learn as much as possible, all the while looking for things that refute and disprove our hypothesis. As long as things [that would be profits] move along smoothly, there isn’t any need to fix something “that ain’t broke”!

However, you can’t sit there and pretend things are “OK”, when they’re not, and somehow pretend that “once in a [name the number] year event” is unfolding before your eyes; it ain’t, it’s your model or algorithm that is faulty and needs some work.

Of course, all of this before about 5 – 10 years ago, would be impossible to dissect and analyze; before the rise of HFT’s, before negative interest rates, before central bank interventions, and before overt manipulations. Markets operated in a different universe then, with different rules, and different technology. From a practical and theoretical standpoint, with the very Quants I want to crush as the basis and foundation of my algorithm, I don’t see any way for this newer version [I’m calling it “Volatility Algorithm version 3”] to become more general in nature than it is now; the very definition of its structure is already at the outer limit, it can’t be expanded into more general terms. If there is a large sized market that is traded with good liquidity and volume, the version 3 will map it accurately!

For the very simple reason I can’t know [and neither can anybody else] what every computer generated HFT / bullion bank / or LP bank  in the world is doing to compute a change in momentum off of a bottom in prices to get it to “buy” the market, I do know that no matter the code the appropriate engulfing pattern and/or reversal in price on the M1 will do the trick the vast majority of the time. Of course, there will be tops and bottoms that don’t show these 2 patterns; fine, move on to the next one, where more than likely it will.

As we start next week’s trading, I’ll be incorporating the new version 3 volatility algorithm into my trading; I don’t foresee any problems with fills and/or “false positives” going forward. Directly below, the start of the week’s spreadsheet for the PAMM/MAM. I’ll get the new website sections for the PAMM/MAM spreadsheet and trade charts up and done in the next couple of days.

 



As always, I support what I write and publish; if you have any questions/comments I’d love to hear them [ traderzoogold@gmail.com ], and I will respond back with a personal message ASAP.

Have a great weekend everybody!
-vegas
OUR ‘TURNKEY FOREX’  PAMM/MAM  IS NOW OPEN AND OPERATIONAL; SEE “PAMM/MAM MANAGED MONEY PROGRAM” IN “DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND START YOUR JOURNEY FROM WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!
 





Friday, February 24, 2017

ASYMMETRIC TRADING

“I’m really good at cipherin’ too!”


“Sure, I know how to trade, I spent last night at a Holiday Inn Express … how hard can it be”? Well, if you’re a complete doofus putz like me, and put the wrong order in to start the day, it’s got potential to be rough; long story short, an early USDJPY trade became a EURJPY trade, and promptly went south. A gold trade later at the RM=1 exhaustion line erased most of the mistake trade; if I could read an order box … well, you know the rest … this is the kind of trading day [Friday no less], where a lot of things can go wrong quickly … I don’t really care about the $20 something bucks I dropped for us today collectively … really, for me this is mostly a “scratch” day that doesn’t mean anything other than getting you late to your millionaire party by a day … what is grating on me like sandpaper are 2 things; 1) stupid poo poo that infuriates me to know end [like this morning], and 2) accepting market risk in extremely thin market conditions commensurate with reward [as in, “there ain’t much”].


I’ve said this before, but it bears repeating; “When Asia bids it higher along with Europe, New York is going to go down at some point later in the day; when Asia sells it off overnight, and Europe does not bring it back up, look for New York to put in a good rally at some point; and when Asia & Europe do nothing and HVALUES ARE PUNY … well, anything can happen”. This is very much a market where “waiting” for the downdrafts [to get long] is preferable to about anything you can name; and if you get near the high of the day, being short with a stop will be an adventure you might not ever forget.

In case you’re wondering why I have traded very light this week, in terms of volume size of a trade versus capital, it’s for this very reason; especially in gold, the market can turn on a dime, and go very fast in the other direction. If you get caught with size, the dealers will kill you; and really, USDJPY isn’t much different. It would really help, though, if New York trading ranges were consistently higher than what we are seeing now; even with the “sell grenade” that took us down to the 1253 level earlier today, for the rest of the day you’re looking at a $5 range basically, which isn’t very good, certainly when taken in context with going down $5 in 5 M1 candlesticks and then followed by the Friday cricket parade.

I’d love to “position scale” gold, but the ranges we see make it almost impossible; for example, if I get long at 1253, and another at 1256, and another at 1259, if the market could move up into the 1260’s it would be a huge profit with little risk. However, look at today; during the “blitzkrieg” lower on the USDJPY “rip your face off” rally, I'd be forced to sell into a falling market my entire position; who knows where my fills will be in this mess at 3 times the size. There simply needs to be better intraday volatility in the New York session before I do this [$10 - $15]; something we aren’t seeing right now for sure. [But don’t worry, there will come a day.]

What I mean in today’s title by “asymmetric trading” [besides it goes down a hell of a lot faster than it goes up], is the shape of the M1’s; what we are seeing with increasing frequency is either bat excrement volatile M1’s that spike [up/down makes no difference] $2 - $6 in less than a few seconds, and M1’s that have a range of about 30 – 40 cents; in other words, the “barbell” chart, and what I’ve been saying for a while now, which is “speed of light trading” & crickets with almost nothing in between. I have no idea what “normal” trade flow is anymore with gold, cuz right now it’s everywhere & nowhere with your stop at risk.

And as today’s trading proves with that $8 dive in 37 minutes, nothing is safe in this market; and worse, if you got caught in that, where is the “give & take” in the market for you to get it back? Well, the LP isn’t going to give you the chance; and if you decided to liquidate during one of the downdrafts, your fill is on the bottom waiting for you. Which is why, anytime this stuff gets within a few dollars of the high or low of the day, you have to be extremely careful about being on the wrong side of this hand grenade or the loss has the potential to be a lot bigger than you would want.
 

Over the weekend I’ll have a special blog update on Sunday night; I’ll detail the changes [and why] I’m making with the algorithm to deal with the “barbell” markets we are witnessing on a daily basis. PAMM/MAM spreadsheet will be up and current tomorrow; tonight I’m upgrading the Excel spreadsheet software. “And yes, I’ll have ‘Post It’ notes plastered all over my screen Monday morning reminding me to trade the right market; right along with the ID draped around my neck with string that says ‘return to the Mrs. if he appears lost’. I'd go have a drink, but I'm afraid I might drown myself ... it's not easy being me”. I'm so outta here.

Have a great weekend everybody!
-vegas
OUR ‘TURNKEY FOREX’  PAMM/MAM  IS NOW OPEN AND OPERATIONAL; SEE “PAMM/MAM MANAGED MONEY PROGRAM” IN “DOWNLOAD LINKS” SECTION IN RIGHT HAND COLUMN FOR DETAILS [VIEW ONLINE AND/OR DOWNLOAD] AND START YOUR JOURNEY FROM WHERE YOU ARE AT TO “ESCAPE TO SUCCESS”!