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Tuesday, March 7, 2017


“From this hurricane what leaves you first: your wallet or your sanity?”

There is no question in my mind, that right now as we sit through this boring, nothing USDJPY market [3rd day running], that we are in fact smack dab in the middle of a financial hurricane; first “eye wall” will start to hit on the afternoon of Wednesday, March 15th, and depending on what happens in the Netherlands later in the New York day after the FED and U.S. Treasury announcements, either pick up further steam or reverse and catch everybody on the wrong side. Either way, most likely we’re looking at a 300 – 500 PIP move over a few days before things settle down some. At least in this particular case, the event risks are well defined and known to the market, and we aren’t sitting in uncharted waters.

Hurricanes come in many forms, and as my “cousin” pictured above so aptly proves, make sure you understand what you’re dealing with when close to one, cuz the “upside” is limited and the “downside” is something has got to go; either your wallet, your sanity, or both.

Over all the years I have used the “40 PIP rule” to trade U.S. Dollar pairs [either XXXUSD or USDXXX], I have 3 observations to share with you; 1) when I’m stuck in mud, i.e. a boring, dull market that can’t make 40 PIPS to save its life, I hate it and think about [but don’t cuz I know what the consequences are] maybe trading a little anyway, 2) when it’s “over” and volatility returns I’m so damn glad I didn’t trade and end up doing “stupid poo poo”, and most importantly 3) the fact that the reason the “40 PIP” rule works so well isn’t because it’s a “function” of volatility, but rather a “dynamic variable” of the version 3 volatility algorithm.

I said yesterday, and I hope all of you understand the subtle significance of what it is I’m saying; “all very large traders [HFT’s, hedge funds, banks, etc.] use proprietary computer code in their algorithms to trade USDJPY [and the rest of FX as well]. We will never have access to that code either individually or collectively, and very few even if they had it would understand the math behind it … but … I can guarantee 2 things the code does without knowing what the specific code is spread amongst all of them; 1) they ALL track, analyze and attempt to profit from short term momentum, and 2) they ALL attempt to run retail stops through textbook support/resistance models so they can liquidate their positions at the most advantageous prices at tops or bottoms. Compared to their networks, our MT4 platforms are “tin cans with string”; but, we have one thing the computers don’t, and that’s the ability to “project” final M1 formations before they close the minute and inform the computers it’s time to buy/sell.

As my great grandmother used to say when she was alive when I was a kid, “You don’t want to work? Then you’re a bum! You don’t want to come over to my house for coffee? Then you ain’t my friend! You aren’t in church service on Sunday morning 7 A.M. sharp? Then you’re a heathen and deserve God’s judgment!” In other words, PROOF IS IN THE PUDDING!

I have stated many times that when it comes to trading, it is neither “associative” or “commutative”; just because A = B, does not mean B = A. Just because a short term bottom/top or a retracement bottom/top has been put in, doesn’t mean it “has to be” an engulfing pattern or reversal of some kind; however, when price moves in one direction or the other at least 15-20 PIPS and retraces the day’s trend, an engulfing pattern or reversal at the bottom/top happens plenty of times, and when it does it sets off alarm bells at the HFT’s and other large trading desks that the correction has come to an end. BEFORE ANY MOMENTUM INDICATOR YOU WISH TO PUT ON YOUR MT4 EVEN HAS A CHANCE TO RESPOND TO THE ENGULFING OR REVERSAL PATTERN, the market moves and the bottom/top has been put in. No matter what you code, when you get the buy/sell signal they’re now ready to buy/sell back to you! THEREFORE, IT IS IMPERATIVE YOU UNDERSTAND THAT THE PATTERN FORMATION IS “THE CODE!”

If you have been observing USDJPY these last couple of days, you have your proof right in front of you of what I said before; namely, the version 3 volatility algorithm is the “general case” of prior versions. Before, when the market would get slow like this, the signal components would collapse onto themselves and give off “false positive” all over the place. With version 3, the signals still work, but their effectiveness is limited because the market isn’t going anywhere and intraday volatility has fallen rather sharply over the last few days; BUT THEY STILL WORK! So, as I said before, even though they aren’t worth chasing, in very slow markets the version 3 still works.

The “40 PIP” rule, therefore, is a “dynamic variable” in version 3 in the sense that exceeding it means there is room for retracements and higher intraday volatility which gives us the ability to treat trades as either “scalps” or “free trades”. When it’s not there, the market does not give us these options.

Therefore, the “40 PIP” rule isn’t a function of volatility, but a dynamic variable function of the engulfing and/or reversal patterns; it is specifically the “code” of these formations after the market has told us intraday volatility is present [HVALUE > 40 PIPS], and thus allows these formations to be statistically significant [some kind of profit] precisely because there’s “room to run” up/down after 40 PIPS has been achieved [“And we know this for a fact because the profit ratio (PR) when 40 PIPS achieved = approximately 4.3, and when it isn’t achieved = approximately 1.6, over the years and decades USDJPY has traded”.]. All along I was right, but for only half the reason I thought; when the market is active, these formations shine when they show up, and they show up plenty of times.

So, it should be obvious; “we want to be trading when the signal parameters are at their most effective and statistically significant, and we want to sit on our hands when they aren’t”! And this is what the “academics” in finance [the same ones who say I can’t exist] don’t take into account; 1) they mistakenly believe all time and price parameters are equally significant and that none have an advantage over others, and 2) they can’t see the “code” in the formation on the chart and therefore treat it as “voodoo”.

And what I’m telling you, is if you strip away the known problem areas [days HVALUE < 40 PIPS, and potential bottoms/tops that aren’t engulfing or reversal patterns when H VALUE > 40 PIPS] where trading conditions are problematic for profits, what you are left with is a trading environment better than owning a casino in Las Vegas! Cuz what I’m saying to the market is, “give me the highest probability scenarios possible that put me in a profit position; from there I will make the call to scalp or ‘free trade’ it; that’s all I’m asking, now do whatever the hell you want”.

Turning to today’s market … I came, I saw, harrumph! … It didn’t take but a few minutes to see that EURJPY was in no mood to be any more active than USDJPY; when the Euro would go up the Yen would go up, when the Euro would go down, the Yen would go down, and thus the cross was going nowhere … quickly! So, that yielded nothing, and I’m back to waiting in USDJPY for it to do something.

Gold for it’s part, if you’re watching it, has no trade flow to it whatsoever … watching the bid go 30 > 65 > 95 >99 >71 >48 >30 in about 5 seconds … then rinse & repeat, and you quickly realize that if you are trading any size at all, you will [not an option on your part] be doing 2 things; 1) giving a shipload of money away to the dealer LP in slippage, and 2) biting off more risk than you can realize if the market turns and you have to get out. Ok you say, “well, use limit orders, that solves the problem doesn’t it”? MY RESPONSE: “1) you’re only going to get that limit fill if the LP can arbitrage it somewhere else and make money (just like a market order), and 2) just because you have a limit buy/sell doesn’t mean you get your price! [Hint: see customer agreement you agreed to when opening account.] If you have a limit sell in gold at 1220.00 and the market rallies from 1218 up to 1220.03 bid, and then immediately the next bid is 1219.58, there is a very good chance your fill is going to be 1219.58, and the LP will say to you that they couldn’t get your price so they filled it at the next bid possible. Oh … you didn’t know that”?

So, take whatever you’re doing for your own account and jack it up to 400 OZ., or 500 OZ., or 1,000 OZ. or more, and then tell me just how bad it’s going to be from these LP sharks when either my stop gets hit or I have to liquidate at the market the wrong way; cuz I don’t know, you don’t know, and the only thing for sure I know is that the LP will fill me just over “outrageous” and just short of “indicted”. How many of these does it take for the “money boat” to start some serious leaking? [Hint: not very damn many, and this is the reason I’m not trading gold right now. Reward not even close to the risk, so leave it alone.]

Looking out a little, directly below is the USDJPY daily chart, with Ichimoku cloud formation. As you can see, daily highs have been bumping up against resistance on the cloud, and since this indicator is very widely followed in the Pacific Rim part of the world, you can’t totally dismiss its significance … kind of looks like a “flag” formation is being put in, and if true indicates the half way move up to a retest of the highs around 118 … that could easily play out with 1) Fed hikes ¼ point fed funds rate and gives hawkish rate guidance forward for 2017, 2) Treasury gets debt ceiling lifted, and 3) Wilders loses Netherlands election … we’ll see, but I wanted to point this out today.

Here we are at Noon time in New York, and again today it appears, unless somebody decides to do something, that we have another day of HVALUE < 40 PIPS; right now as I write, HVALUE = 23.9 & LVALUE = 18.9; even considering event risk next week, this is pretty pathetic in scope. Really, I think it has as much to do with event risk as it does shorts getting wiped out on February 28th in the reversal; nobody it seems wants to go out on the proverbial limb right now.

For Newbies to the website, and those that have only been here a short while, and/or those who are thinking about participating in the PAMM/MAM program, I’d like to share some thoughts on “escaping to success”; 1) finally, I have the house that I want, not the house I have to accept, 2) I trade on behalf of clients the deepest, most liquid [except when they ain’t], and lowest “net” cost markets in the world, 3) my fees are about the lowest in the world, 4) I use moderate to low leverage and am primarily “risk averse” rather than “profit oriented” in trading, and 5) over the years, my profit goal of achieving 1% per trading day is accurate.

Finally, getting the trading conditions I wanted in the PAMM/MAM at Turnkey Forex is something that I have been waiting for going on 5 years; yes, it’s taken that long. And what this means is more money in everybody’s pocket and account, and less going to the LP bank and brokerage house. What we finally have in the 4 markets I’m primarily interested in are the lowest “net” trading cost available to the public; and then to have that carry over into the PAMM/MAM is truly ground breaking. Because up ‘till now, every place out there had conditions that were less than ideal; high spreads, high round turn commissions, and volume requirements, and that’s not even mentioning slippage and other issues. And the savings all get passed to my clients!

The very best market to trade right now is USDJPY, the last 3 days notwithstanding; best liquidity [except when it ain’t] and largest spot market on earth, which means no matter how much money I manage, I’m never going to move this puppy one iota. Add to that, the absolute lowest “net” cost to trade [about ½ PIP] with better conditions than if you bought a CME membership!

I charge only an incentive fee of 17% on cumulative high water marks on profits; that’s it, no other fees. I consider 17% “fair”; not expensive or exorbitant and not dirt cheap. If I were a customer of myself, this is what would be acceptable to me. Others can charge whatever they want, and I can’t speak for their reasons. In the interest of total disclosure, I do get a rebate from Turnkey on their share of round turn commissions, which amounts to less than $1 per 100,000 notional value; this doesn’t affect a client’s spread, cuz whether I get a rebate or not the client still pays Turnkey $2 per 100,000 notional value of the trade. All it means is that Turnkey is willing to share their commission with me for bringing in the business to the brokerage house; nothing more, nothing less. So, since it has no affect on any client’s cost to trade, I might as well take the money they offer. If it in any way added to my client’s cost of trading, I wouldn’t do it.

When I trade for clients, I use moderate to low leverage consistent with a “risk averse” philosophy, rather than some who are totally obsessed with profits [and then never get them]; what this means, is that my very #1 top priority is “not getting whacked”! Now, nobody goes through a trading career with no losses … anybody who says or intimates this is a liar and/or fool. The first rule of trading is DON’T LOSE LARGE AMOUNTS OF CAPITAL, and the 2nd rule of trading is never forget rule #1. The key to “escaping to success” is meaningless, small losses that can easily be recovered. Hand-in-hand with this is moderate to low leverage; “I don’t take shots with high leverage; losers have this attitude. I have the statistical advantage when trading versus others; therefore, my strength is cumulative over trades, NOT taking extraordinary risks via a high leveraged trade hoping to hit the moon”.

Over the years, yes I have made a tremendous amount of money trading … most people know that, and the results speak for itself without any need of embellishment from me. There are really only 2 things I want to point out; 1) in the past over the years, my track record shows that money grows roughly about 1% a trading day, and 2) besides making people a shipload of money, which I view as secondary, my proudest accomplishment has been throughout my career THAT NOBODY AT ANY TIME HAS EVER BEEN DOWN DOUBLE DIGITS AS A PERCENTAGE OF CAPITAL … EVER.

There was a time back-in-the-day when I was on the trading floor, when I had a Big 8 accounting firm crawling up my backside every single trading day FOR 3 YEARS … yea, 3 years. I told them at the beginning that’s what I wanted, and through their laughter they told me I was nuts; nobody does this amount of time … nobody. Too many things can go wrong … markets change … you’ll lose money … I will lose interest … blah blah. Over that time, which is audited and in the public domain, there were quarters [that’s 3 months for you almost college graduates getting free tuition at State U.] where I only made a couple of percent. And then there were months and quarters where the accountants begged me to stop making money cuz nobody would believe it and they would have to attest to it and people would think they were lying … seriously, it’s true.

Bottom line is it came out slightly above about 1% a day; so, this is through crappy weeks, a couple of dead months now and then, good times and all the rest. So you don’t have to do the math, it was about 1,400% annualized. Now, maybe I do better or maybe I do worse … I dunno, cuz I can’t predict market behavior or volatility. What I can tell you is I have “floor trading” conditions at Turnkey and that is critical for our success. And just so somebody out there doesn’t get the wrong idea, I’m not predicting or projecting past success into the future for you … like I said, it could be better or it could be worse, I’m just telling you what “has been”.

I have always taken a very careful approach towards client money; I’m not some “cowboy gunslinger” from ‘Trading Places’; my philosophy has always been to “stay out of trouble” first, then seek profit. On those days we do very well, it won’t be because I went out on a limb and bit off more risk or took a shot with high leverage; it will be because I “position scaled” and chose the least risky approach to the market consistent with profit potential.

When I started the PAMM/MAM, I was still using the version 2 algorithm; a series of failed, losing trades in gold & USDJPY that amounted to a few hundred Dollars or so [at the time a little less than 1% of capital] got us off on the wrong foot. Instinctively, I knew something was up with the model, and made the necessary changes which prior blog posts have highlighted. I take losing personally and always have; I’m not gonna sit around and just say, “Oh Ok, no big deal … stuff happens … it’ll be alright … it ain’t much … blah blah yada yada”! I’ve been at this rodeo too long for that kind of cavalier approach.

Since the introduction of the version 3, action has been very slow in USDJPY, the market hasn’t gone anywhere or done anything so the trades have been scalps for very small profit, but believe me, things will pick up shortly; even in these crap markets signals are good [which I predicted the general nature of the model would produce cuz it has to], and these “cluster” days of less than 40 PIPS HVALUES will disappear. So, it’s pretty much onward & upward from here, as soon as USDJPY and/or EURJPY [2nd choice] gets in gear and starts moving again.

Well, it’s 2 P.M. in New York, and again we have no trades today in either USDJPY or EURJPY; USDJPY because the HVALUE is still 23.9, and in EURJPY cuz both the Euro and the Yen are moving in the same direction most all day and it’s HVALUE is 20.5 PIPS [which I’m having a very hard time believing, this is so low]. Forget gold; if you’re interested in losing 10% of your account in 60 seconds be my guest, cuz the risk is there and it’s very real, not just theoretical. The risks are simply way too high commensurate with reward for trading this market right now; sometimes you just have to “walk away” and stay away from the certain “stupid poo poo” you’re gonna step into.

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

Have a great day everybody!


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