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Wednesday, February 15, 2017


“Is this your algorithm Larry? … Is it?... OK, time for Plan B!”

I used to see this all the time when I stood in a trading pit … and really, the “trap” had been set for you long before you opened your pie hole and got in a trade … “what do you do when there is no ‘Plan B”? … and furthering the problem and making it worse, all the while you’re not even conscious of it, all of your wrong answers yield a positive result, thus reinforcing and almost guaranteeing future stupid poo poo from you! … “Ahhh ha, now that’s how you get out of trouble”! … only it isn’t; it just makes the next disaster more probable. You looked up and read the clock, and just because it said 9 O’clock, and it happened to be 9 O’clock, doesn’t mean you’ve figured out how to tell time because you tapped into the cosmic waves coming from the mothership orbiting Jupiter.

When you start from a “top down” approach, tackling the broadest, hardest, most complicated philosophical trading issues first, and then narrowing from there until you eventually get to actually coding something, the journey is going to be difficult, frustrating, and time consuming. Insight isn’t linear in scope; it can’t be planned, and only comes from watching markets work. In other words, you don’t simply ask, “universe, find me something that works so I don’t have to work for a living”. That’s like asking for a perpetual motion machine that outputs energy without any energy put in; sorry, doesn’t exist.

Directly below is a 3D rendering of a probability wave function density map of a hydrogen atom. Since I’m all powerful, for my metaphorical illustrative purposes, your entire trading life is on this map; I’ve blind folded you, and at my whim I pick you up when I want and I place you on a spot in this world. You have no idea on this map where you are at; not a clue, but since I’m a benevolent God I have let you see the map so you know what’s “out there”.

“Who’s up for hiking around the top”?

As you can clearly discern, your trading life has got some “points” on it that are going to be a problem for you if I place you directly on top of one of the peaks; one wrong step, and you’re gone. On the other hand, most of the time I place you on terrain that is easily handled; you might even come to the conclusion that those peaks never really exist because you never experience them! “Man, this is a breeze … what risk? … been here 5 months trading and it’s all Jacks & Aces … I have truly found the ‘Holy Grail’ of trading”! And then one day …

The point of this intellectual exercise is to get you to focus not on the money or what it can do for you, but on the trade and what the “terrain” is telling you. In fact, whether you accept it or not, you live in this world I’ve presented; the wise ones recognize the need for an appropriate “battle plan” [aka algorithm] to deal with the terrain; something they can rely on to navigate the cliffs and walls and help them survive and eventually prosper. The naïve will simply drive their car forward by looking in the rear view mirror.

It is so vitally important for you to understand why the algorithm works like it does, but to also know under what conditions it fails; if you don’t know the latter, how are you going to put in place measures to defeat it when you got no clue what it is you’re trying to defeat? As I have said before and my mentor Bert tattooed on the inside of my eyelids many years ago, “Choose the form of your destruction! … and then go beat the hell out of it!!” We know from a strict mathematical logic proof from Kurt Gödel in 1931 [Incompleteness Theorem] that every axiomatic mathematical system has at least one limitation [flaw] that either can’t be proven or logically presents contradictions in the system. So, for example, in basic arithmetic can you divide by zero? Why not? [ “Cuz” really isn’t an answer now is it?]

My algorithm “destruction” form takes the shape of the least probable event in trading; that of volatile markets slowing down to a crawl and exhibiting low volatility. The upgrade to version 2 of the algorithm and the introduction of the Scalper’s Algorithm, and then combining the two, has resulted in eliminating a lot of the “chop” from a slower gold market; the likelihood of the price vector fields being at odds with each other [meaning of course, having different slopes] during market slow periods is very high, and that helps keep me out of trouble.

There is one other aspect to the signals that needs to be mentioned, and that is finding the markets “sweet spot”; i.e. that point of entry that has the highest probability of success of being in a winning position quickly. By introducing a “degree of freedom” into the system [3 or 3+ M1’s contra trend], the system is more responsive in identifying potential trades; if the contra trend correction is too deep [either on the upside or downside], the SDEV [standard deviation] price vector field will flatten out or turn thus negating the trade.

Think of it this way: the algorithm is like Major League Baseball’s best home run hitter; he goes to the plate looking for that fastball he can hit a country mile. He knows the pitcher is going to give him a steady dose of curve balls & sliders, and that he has to “fight off” these pitches and get the pitcher into a 2-0 or 3-1 count to maybe get the fastball. Now, not every time he gets the fastball is it going to be a home run; could be a single, double, or he could even hit into a double play to end the inning. Point is though, he got his pitch because he was … [Hint: Patient Bear.]

“Thank you Mr. Market … now, gimme all your honey”!

Turning to today’s gold market … “Oy, there must be a lot of baby crickets getting made overnight, cuz they sure ain’t trading!"an hour before the open and I’m starin’ at an HVALUE of $4.70 … don’t worry though, something will be escalating quickly soon enough [CPI & retail sales at 9:30 and ChairSatan Yellen in Congress again at 11 sure to get somebody to panic]… still, I’m worried about Mrs. Wantanabe; her and her friends usual MO [modus operandi] is absent. A brief respite while the checks clear? … or … a change in their trading habits? … Just cuz, I’m going with Plan A”.

Sure enough, reports at 9:30 lit the fuse … first trade directly below.

No bounce off the lower exhaustion line says, “Get the hell out N.O.W.”, and was a scratch trade thanks to tight spread conditions and a meaningless RT commission.

Directly below, here are my other trades in succession, all of which were either insignificant gains [couple pennies per OZ.] or scratches.

The bounce off the lows generated some short signals, and generally speaking, the HVALUE and daily range at this point are moderate and aren’t of concern at about $12; what is worrisome, though, when you are short and the market has recovered some is time, specifically the time when it is just sitting there doing nothing but consolidating minute after minute. Point is, it ain’t breaking, and what you must remember when trading gold [especially gold] is that shorts always panic first. “He who panics first, gets to panic again later”!

First we had the down panic; now we get the up panic. Buy signal for the next trade directly below.

Not liking this trade up here at these levels; too far too fast, and so I’m treating this as a scalp and putting some profits on the board; market needs to consolidate some and shake some people out.

From the action in the marketplace I’ve seen since gold once again crossed $1200, backed down to 1180, shot up to the 1240 level and has now backed off some, I would characterize the trading action as bullish; USDJPY has put in a monster USD rally from the 111’s to just now a few PIPS short of 115, and gold is only off about $16 from the recent highs? True to its form, gold ignores bad news [like Fed rate hikes] in a bull market, and ignores bullish news in a bear market; and what we are seeing now is totally bullish action considering bullion dealers tried and failed to kill this stuff this morning and there weren’t enough massive sell stops below 1218 to save them. Now we’re back in the mid to high 1220’s; is there enough juice to put in a significant reversal day and get price back up in the 1230’s to challenge the highs again?

Another buy signal, another scalp directly below.

I liquidated this on the way up: until the market shows me it can make new highs and plow higher today, after the waterfall down earlier, I’m very hesitant to hang on and treat gains as “free trades”. Probability wise, it is very difficult for gold throughout its history to make significant reversals in price of over $10 per OZ.; for all trading days, it’s on the order of approximately 0.20% probability of occurring on any given day. In other words, hanging on and betting it’s gonna happen is a losing proposition; 6 trades, daily goal finally accomplished, I’m done.

One of the great “fingerprint” patterns gold exhibits, and has for years, is the “double bottom” or “double top” on the M1 for either the continuation of a move or a setup for failure. Today’s bottom didn’t really have that, cuz when it moved off the low it just kept going up; although not rare, it isn’t a common occurrence either to see this type of “V” bottom. More often than not, gold will put in a double top or double bottom failure before reversing; this plays into the algorithm’s hand in that, if in fact the short term trend is going to change, it gives us an opportunity to get out near the top/bottom. Having said this, of course, there will be many times gold will exhibit and show “failure” one minute [and then I get out], and then go bananas in my profit direction the next; it happens, deal with it and move on. This “game” is only about winning at the end of the day, and you can’t dwell on water under the bridge.

I’m ready for the beach … where’s the dog? [sshhh: sleeping!] … “hmmm, I think he’s dreamin’ cuz he’s got that smile on his face.”

“Ok, nowwwwwwww I know why he’s smiling”! I’m so outta here … beach beckons … “c’mon, let’s go find that red car” … until tomorrow…

Have a great day everybody!




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