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Thursday, March 9, 2017

FRACTAL PATTERNS & HUMAN BEHAVIOR


“What markets do to traders.”

In the mathematical filed of “fractal geometry’, Benoit Mandelbrot is generally considered the father of the discovery of fractals, with his pioneering research work at IBM computing labs in the late 1960’s – early 1970’s; this, of course, is in a time and place where corporate America heavily supported research and development and executives weren’t nearly as “paranoid” about quarterly earnings reports and their effect on their stock options like they are today.


In every day life, all of us are familiar with 1,2, and 3 dimensional spaces; growing up and back when schools actually taught something besides social babble, by the time you were in 6th or 7th grade you were very familiar with elementary geometry and linear algebra; “fractals”, as their name implies, are fractional dimensional spaces, so instead of X squared [the power of 2], you could have X [power of 1.618] or something like that.

As computing power exponentially increased, in the early 1960’s Edward Lorenz at MIT used an iterative function [endlessly repeating the same math operations] and found that very small changes in function variables produced very large end results [the “Butterfly Effect”] in differential equations; his equations became known as the “Lorenz Attractors” and is a cornerstone of Chaos Theory.

Which brings me to “real life”; you know, the one you’re supposedly living? EXIT QUESTION: “In your life, is there anything that gives rise to ‘fractional dimensional spaces’ and makes you sit up and take notice”? Of course not. Which brings me to trading markets; “If I gave you candlestick charts of M30 of IBM, HR1 of Cotton, daily of Amazon, M5 of soybeans, and finally M1 of USDJPY and stripped out the time and price grid, could you tell me which chart is which”? SHORT ANSWER: “Nope, not even close”. Why not?

The answer lies in the fact all markets are fractal in nature and scope; no matter where you start, going up in time or down in time, the charts are going to look the same, the patterns are going to be the same, and the same things will happen in all markets over and over again, endlessly repeating. Sooner or later anything you see in one, no matter the time frame, you will see again in another market later in a different time period. For example, I could take any HR1 nearest month cotton futures contract and then go back on the M1 in USDJPY, and quicker than you might imagine find a sequence that matches what cotton did on the one hour. Why?

That answer lies in the fact that all markets are ruled and governed by human emotion [aka greed & fear], not cold, hard logic; in the collective over millions of traders, through the centuries, decades, and years markets have been around, the only thing that changes are the names of the participants!

This is why I tell people, that if you wish to become a successful trader, you have to learn to forget 1) your education, and 2) your business and/or life experiences, because they are useless in trading. Nothing in life prepares you for trading; and while there are infinite metaphors for “life is trading” and “trading is life”, you won’t be able to draw upon anything that makes sense when SHTF and you have to make split second decisions that have very real consequences. It’s very tough to envision the “falling dominos” scenarios that precede a trading decision.

Even though the math is there to guide you, very few people want to “trust” the math at “crunch time”; most people, when they begin trading want to slow the process down, so they can think things through … as if this whole process is something that can be “discussed out” by learned types who sit in the faculty lounge and pontificate about worldly things … “Ummm, no – fish or cut bait now Skippy”! And after it’s over, a sudden realization overcomes the senses with a very definite “WTF just happened”? Ok, time for round two, are you ready? “And the guts say no”.

And it only takes one time for news event “A” to send USDJPY skyrocketing, only to see the same news 2 weeks later sending USDJPY plummeting, for your brain to go “full metal TILT”! And as you search for “meaning”, all you are in essence doing is going farther down the “rabbit hole” to meet and greet “The Queen of Hearts”. And so, many give up, or worse simply reiterate the process until the bank account says “no mas”.

And so, markets are guided by the math, but your brain doesn’t want to believe it; ask yourself if you instinctively start thinking, “nah, it just has to go back up … just has to … Fed raising rates is bullish … this loss I’m eatin’ is just short term … when it gets back to the high I’ll get out.” And when all the business school and/or graduate school logic fails you, then what? “You sell the bottom, of course”!

And all this I know for a fact because of “been there … done that”, lived it, dealt with it, got slapped around some, and came out battered and bruised knowing one thing for sure; “learn the right way to trade or have a nice life in the Pudding Business”.

Fortunately for all of you, and I mean this seriously, there are “demo accounts” and the amount of information at your fingertips is mind blowing in form and scope, and not that I’m some kind of genius or anything, cuz I certainly am not that presumptuous to entertain that, but at least I’ve been down the road many if not all of you want to travel down, and I know what the road looks like up close and personal.

In our personal lives, many times our actions either have none or very delayed ramifications via consequences; in trading … never. For many people, this is an abrupt subconscious slap in the face, and you simply have to learn how to deal with it and handle it. In other words, it ain’t easy being me.

Turning to today’s trade … one algorithm trade early that started out promising, but quickly turned the M1 pattern to a “Shooting Star” at the high of the day [bearish pattern formation I write about in the algorithm manual], which got me out of a long position less than 2 PIPS from the high with a tiny gain … from there it’s been down, and we have retraced back under the 50% day’s range level for the day, and I’m now awaiting “Super Mario” and the ECB to do something stupid at 8:30 New York time, when announcing ECB rate decision with subsequent presser full of “blah blah yada yada”. Day’s first trade directly below.


Another algorithm trade later, although a couple of PIPS separated the entry point from where I got in; with only a “50-ish” PIP range, I thought the trade off on momentum for basically 2 PIPS was worth it. And, USDJPY hit a wall of selling up here in the 80’s. Trade directly below.


All-in-all, another crap day; 6th day in a row we’ve been like this, where a substantial part of the day’s range as well as the HVALUE gets eaten up with a nasty up/down spike; and then after that it’s crickets with chop in a tight band the rest of the day. There isn’t any follow through … nothing but a stop hunt on both sides and some very quick smaller spikes that are simply “1 hit M1 wonders”. There are always periods like this sometimes in the markets; brief sporadic activity and then nothing for hours in what seems like days on end … nobody really captures much of anything but plenty of people get caught the wrong way and have to cover … in the scheme of things, really not so long, but when you’re in it like we are now, the key thing to remember is to preserve capital … don’t do “stupid poo poo” … lower leverage and be quick on the trigger until conditions change … in essence, ride out the “crap conditions storm” and come out the other side unscathed … you can’t make this stuff move [meaning USDJPY] when it doesn’t want to, and as today points out in spades, you buy “the breakout” and all  you’re mostly buying is a 3 – 5PIP correction most days.

From a strict signals standpoint, the version 3 algorithm made some correct calls on the turns; the chart directly below points this out later in the day with some “hammers” off of a correction low.



I will add that with these hammer formation lows, the market is less than a PIP away from penetrating the 50% level of the day’s range; if that gives there are likely sell stops underneath; if I buy this and it goes South, the position has no room whatsoever before stops are set off. As it turned out, it would have been a good trade, but like I said above, when conditions are crap you don’t go “full metal jacket”, you scale back cuz it’s the proper way to trade; if it goes South I’m down probably 10 PIPS with nowhere to go. I’d be on the wrong side of the market heading into an afternoon, which if price declined further has the potential to get ugly; “no thanks”, I’ll simply pass on this trade cuz risk/reward is not very good.

Tomorrow is NFP Friday, and I would expect Asia & Europe tonight and early tomorrow to be one level above comatose until tomorrow morning; given the ADP numbers earlier in the week, this report better be gangbusters or USDJPY will sell off. Unless the number is “5 sigma” horrible, any kind of halfway decent number and the Fed is still going to raise rates next Wednesday, so I don’t think the selloff will be severe and the market can be bought on the turns with the algorithm.

Collectively, we technically made money today, but with RT commissions we’re down about $3; essentially a scratch day. I don’t like treading water any more than anybody else, but there isn’t anything I can do about it when the market literally spends about 7 M1 candles spiking and then about 700 M1’s going totally nowhere in 11 hours.

The ranges and HVALUES are very poor, the price action is terrible, and market volumes are somewhat muted; having said that, the version 3 volatility algorithm is doing its job in USDJPY in 1) keeping us out of trouble, and 2) keeping “false positives” to a bare minimum; there was only one I saw early today, and it was an “iffy” signal to begin with.

Beach beckons … PAMM spreadsheet directly below … I’m outta here until tomorrow.



Have a great day everybody!
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