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Monday, March 6, 2017


“And you thought the algorithm manual helped you do what?”

The version 3 volatility algorithm manual is posted over in the “Download Links” section of the website [right hand column] for viewing online and/or free download from the cloud. I titled the manual the “MT4 Version 3 Volatility Algorithm” because you use the same algorithm in every market. At the same time I took down the other previous manuals and files because they are no longer needed and are outdated.

As with previous documents I have authored, I try and be as concise and to the point as possible, realizing at the same time that there are a lot of “what if” scenarios left blank. I want to give you the information quickly and efficiently, without the need to wade through 300 pages and most likely put you to sleep; the purpose of the blog is one of continuing education where I can “fill in the blanks” so to speak, from time to time, as issues pop up and become apparent in the marketplace.

I’m hoping I will have the “tutorials” revised and updated by next weekend; as you can imagine, it’s a lot of work and writing and takes some time. From my standpoint and perspective, it’s a labor of love, so I enjoy doing it and it really isn’t “work” in the traditional sense.

Over the years I’ve seen and witnessed markets change on an unprecedented scale; not much ever changed when physical trading pits were still around, but since electronic trading became the “de facto” standard, things have only picked up speed and changed ever faster. Even when I was doing version 2, in the back of my mind this “pace of change” was worrisome; wondering to myself, “my God, how much more can these trading paradigms change and what next”?

In reality, the version 3 volatility algorithm came to fruition, not by a “top down” approach, but by an “ass backwards” follow-it-up the food chain type of analysis from failed trades in gold and USDJPY. There’s a difference between an occasional loss from probability, and a series of losses that can’t be explained other than one of two ways; 1) you’re in a “tail risk” once in a hundred year event, or 2) your model is faulty. Well, there was no unusual activity in either market to give rise to saying, “whoa, look at this action … man it’s crazy … won’t see this again for …” so I knew it had to be option 2.

And after sifting through a literal mountain of data, my first reaction was, “in the new paradigm of ‘speed of light’ trading to crickets’, there isn’t anything you can put onto the MT4, no matter how sophisticated the code or larded up with math, that can possibly be quick enough to react to market moves and give you a high probability signal. The fact is, limitations in the time frames of the MT4 prevent us from seeing anything/everything that HFT’s, banks, and large hedge funds who move the market see; anything under a minute and we are totally blind! So, no matter what I or anybody comes up with as an indicator of a short term trend change, it’s gonna be LATE to the move by at least a couple of minutes and most likely more like 5 – 7 minutes, and that can be huge in terms of price”.

So, what is it at the “micro” level that changes the market from “dog food” to “filet mignon” and gets large institutions and traders to switch in a heart beat from one side to the other and rush off in a kind of dizzying market move that leaves me sitting here going “WTF is this”? Meanwhile, my indicators are still relatively asleep at the switch and can’t “see” what the hell is going on until it’s too late; by the time they say “buy” the move is 75%+ over and I get to get long in the “crickets” phase of this and go from there. This obviously isn’t where I want to be. This used to happen in markets and was considered an anomaly; today it’s an everyday occurrence.

As I often do when I’m looking for insight, wisdom, or even subtle hints for things I may have passed over in the past, I go back to the “masters” and just start reading. I was reading some Gann material on “swing trading”, and he intimated something that caught my eye; he was talking about the “swing” out of a correction and how most times that occurrence didn’t happen slowly, but rapidly with a change of sentiment in the marketplace. And it immediately got me thinking about the many days back in the “pits”, locals would get caught long or short and the market would move, and you’d have a whole bunch of guys saying or telling themselves, “next break down I’m buying and getting out of these shorts and then getting long … did you see how fast we just rallied”? And of course, the proverbial train had just left the station and wasn’t coming back for anybody.

As I started to try and figure out how the HFT’s [and others] were using their “super secret” code worth billions to get the jump on others, I’m looking at turn-after-turn-after –turn in the market and seeing the same damn thing at tops and bottoms AFTER MOVES; namely, engulfing patterns and reversals I mention  and show in the manual.

And now, everything crystallizes in about a nanosecond; SDEV as the “general case” for exhaustion moves that track every exhaustion move, not just the ones from the old model; seeing and beating the HFT’s computers before they get their signals [not always but often enough]; and understanding that these candlestick formations after moves have a very high statistical significance even before I measure them and see!  And in a nutshell, there you have it, cuz in an instant I realize the pattern itself IS THE COMPUTER CODE, and I certainly don’t need to reinvent the wheel; all I have to do is sit and patiently wait for the proper set up that we get multiple times per day, even in conditions that totally suck [umm, like right now for instance] and activity is super slow [my term, which is “crickets”] to bat excrement crazy. In other words, version 3 covers all the bases!

To be sure, not all tops/bottoms, retracement tops/bottoms are engulfing patterns or reversals; some go far, some don’t, and some occasionally lose. But there are enough of them per day to wait for them because they appear constantly at the turns, and all I’m asking from a trade in a perfect trading world is to be up money in a position so I can determine whether I want to scalp it or “free trade” it anyway. I don’t care if I miss a retracement to another formation, cuz it doesn’t matter; what matters is the code for turning is solid with engulfing patterns and reversals and puts me where I want to be in a trade. I don’t think you can ask for anything more than that from trading and expect to actually get it.

Here at the NY open, after 5 hours of complete nothing in USDJPY, even the crickets are complaining it’s too slow … current HVALUE = about 28 PIPS and current LVALUE = about 8.5 PIPS. And gold? Yikes, don’t even go there … seriously, I’m wondering about Asia, and while I’d like to think the Chucklehead gold traders there along with Mrs. Wantanabe, that I chide almost every other day, got something to do with it, that’s too easy an explanation … Europe I can understand, as the financial elite are paralyzed right now wondering if their socialist utopian vision for the deplorable masses of the Netherlands will hold or give way to Gert Wilders & crew who will change everything the E.U. stands for and wants … we’ll see what happens, along with Yellen, and the Treasury debt ceiling, all on the same day! Bottom line is that Europe is on hold … wait and see … and very little movement in anything is taking place as markets drift when they are open.

Here we are an hour in, 30 minutes from stocks opening and … crickets. Pulse rates at the county morgue show higher activity than USDJPY right now, and if USDJPY ain’t movin’, nothin’ is movin’ … wow, is this slow … feels like the day after Thanksgiving, and nobody is doing anything; trade flows as low as I’ve seen them in a very long while. Not counting Sunday, the last 3 trading days have been terrible; I said before that these kind of events “cluster”, now it’s time for the cluster to go away!

Almost Noon in NY, and even the Euro has a bigger range than USDJPY … crosses are quiet as well … a little movement in gold, but I simply do not trust this market right now, as risk [long or short] is very heavily skewed to random spikes that kill stops, and I don’t intend to be part of that crowd.

Ok, we are working our way into the afternoon in NY, and USDJPY is drifting up slightly but basically dead; 2nd day in a row Yen activity has been muted to almost non-existent. If the trade tomorrow is like today, I’ll switch over to one of the Yen crosses, either EURJPY or GBPJPY to pick up activity; because the crosses are … well, crosses … they don’t have the 40 PIP rule because there are 2 pairs involved and will generally move somewhere and have decent to above average  HVALUES and daily ranges regardless of what’s going on in individual pairs. And, most importantly, the signals do just as well here as anywhere.

What we are seeing in USDJPY the last 2 days is the worst of all scenarios; market opens and goes a little up, then goes a little down, then goes back up maybe hitting a new high, but there isn’t any power in the advance, then backs off … all without ever getting to the magical threshold of 40+ PIPS. And so what we are left with are tiny reversals in a drifting market that has no direction for the day until it decides to get one and hurt you; that’s why I leave it alone.

It’s not like I’m asking for the world here; approximately 85% of all trading days have an HVALUE > 40 PIPS, but from this kind of activity you are seeing Friday [before the late break] and today, it should reinforce just exactly why inactive trading days should be left alone; 1) reward is small and risk is high, and 2) see #1.

Ok, it’s 2 PM in New York, time to pull the trading plug on USDJPY for the day with no trades; as I write an absolutely pathetic HVALUE = 27.8 PIPS and an LVALUE = 26.8; I’ve been sitting here for about 11 hours, and it’s worse than watching paint dry. Like I said, if I see this tomorrow morning when I come to the screen, more than likely I’ll switch over to EURJPY. Until gold gets a trade flow and these “mystery” bid/offer ticks that go $0.40 - $0.60 up/down in a heartbeat go away, the reward in gold is not worth the risk when trading it.

I don’t like sitting here doing nothing any more than anybody else, but it’s better than getting chopped up in trades that go nowhere; although the signals in USDJPY yielded some positive signals, hindsight is great when you know there aren’t any spikes to worry about from the charts and you see what happened. Today’s kind of action shows why buying/selling “breakouts” is a losing approach in trading, and reiterates what I said earlier about the visual signals in front of you; “that candlestick engulfing or reversal pattern after a move IS THE COMPUTER CODE!

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

Have a great day everybody!


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