WHEN HEARTACHE RULES

“When you ignore rules, this is what can happen!”

Only because we have been experiencing record low volatilities in the stock indices for months on end [50+ year lows for intraday volatility], did yesterday’s mauling of stocks seem to some “like the end of the world”. Granted, even from years ago, yesterday’s decline was no slouch; but it wasn’t record breaking or somehow noteworthy in terms of its destruction of longs in the marketplace. Simply put, yesterday was a result of 2 factors; 1) the day before [Wednesday], which saw massive “Plunge Protection Team” [PPT] intervention and prices going straight up, and 2) said prices going straight down when they failed to show up and defend the 21390 – 21400 price level on the way down. That, set off alarm bells all over the place, and the rout was on.

When you are trading, you have to have not only a theoretical framework that sets the foundation of your trading, this “framework” has to be implemented as well … and that gets done with established rules, that if you break them, what you are in essence doing is saying to yourself, “well, yea … I know I shouldn’t be doing this, but I have a “feeling” about this, that makes this time different … and if your “feeling” makes you a little cash from the effort, all you have done is made money to put into a theoretical savings account for the day when you’re gonna need it from getting whacked hard. The problem is, all those “feeling” days that made you money, aren’t going to come close to covering the losses incurred ONCE FROM STUPIDITY”. The trick, of course, which most people neglect in their haste to get rich from trading, is putting in place acceptable “trade-offs” that eliminate catastrophic risk while maximizing potential gain from day-to-day activity. What’s the point of any kind of trading rule if it limits gain and has no cap on risk?

On so many levels, yesterday provided a Ph.D. course in trading on what NOT TO DO, so you can be here today. And as I said yesterday, one of the rules of version 4 volatility algorithm is that either the 4^th or 5^th [you pick ‘em] leg down BOTTOM from the New York open [horizontal aqua line] has to be treated as your “line in the sand” for getting long either as a scalp or some kind of short term position; if that last level gets taken out, you simply have to “back away” up and until prices rebound back up above that last level. For example, yesterday morning 21402 was the 4^th leg lower bottom … if that level gets taken out and prices go lower, you cannot get long again up and until the market rallies back above this level and you then get a subsequent buy signal. And the reason is simple: once the market starts taking out these lower levels in succession, you have in essence [whether you either know it, recognize it, or simply choose to ignore it] slid down the probability bell curve into “tail risk” territory.

And when you enter “tail risk” territory in trading, anything and everything can happen cuz there are NO RULES in this section of the bell curve. Sure, you can make a fortune when the market is in this stage, but you can also suffer career ending losses as well … and, knowing how well the universe works for traders at all levels, why should it favor you? … the fact is, in “tail risk” you’ve entered “The Twilight Zone” of trading where the laws, rules, trading activity, and otherwise chaotic “normal” conditions simply are not in play … they’ve been sent packing, and there’s a new Sheriff in town … one ruled by sheer panic on a grand scale. And while it’s easy in hindsight to come back later and look at a chart for the bottom, in real time you get literally slaughtered buying M1 algorithm signals too early and then getting forced out on further lower prices. So, how many “shots’ are you going to take? 2 … 4 … 6 … how many? And when each one hits you like a brick in the face within seconds, and the losses mount up, when do you “pull the plug”? These are simply questions I don’t want to be asking myself. Directly below, I’ve cataloged from yesterday the “selling hysteria” on the M1 on its race to the bottom, with arrows and commentary that highlights what I’m talking about.

Now, make no mistake about it, when you implement a rule inside any trading algorithm, or trading method, you “give up” something; nothing in financial trading is free. What I give up are gains from any/all bottoms lower than the 4^th or 5^th legs lower from the open … of course, somewhere has to be the bottom, so I know I’m giving up a real potential gain by not trading. For me, that is a totally acceptable “give up”, cuz there is no way for me to know where the selling carnage stops once the market gets into the “tail risk” portion of the bell curve. This isn’t a “faculty lounge” type of question where I’m debating existential bullshit from afar; this is real money on the line, and when SHTF there isn’t a person on earth that has any clue where it stops on the downside; markets pretty much always go farther and faster than anyone thinks is possible, and it simply doesn’t do anybody any good to lose substantial amounts of money.

Fact is, there are infinite days where the market never comes close to a 4^th or 5^th bottom leg lower from the open; there are “finite” days when this happens, and so I recognize that on these days it’s more important to limit risk than it is to “chase rainbows” and hope for the best. When the market gets into “SHTF mode”, it must come back up the bell curve and resume standard operating procedure [SOP] within prescribed standard deviations and trading behavior. In reality, we all have limited funds to trade with … nobody here is bill Gates or Uncle Warren B., and can keep buying no matter what until the cows come home …

Unless you have lived through the financial devastation of a stock market crash, you have no idea how quickly all of your money and your career can literally go down the drain. I was at the epicenter of the great crash of ’87 … I was front and center in the SP500 trading pit that day, and I saw many a good floor trader get wiped out within minutes, and at the end of the day got to hear all of the obligatory, “this can’t be happening to me … somebody wake me from this nightmare … WTF do I do now”? Did anybody think it was possible, that it could happen? Hell no they didn’t, and that’s the problem … there was no plan in place to deal with “tail risk” cuz it happens so infrequently.

So, when Newbies to trading tell me stuff like, “Aw c’mon man, you got to be buying on the way down for the inevitable rally back up, it simply tells me they have no clue what the hell they are doing, and simply can’t comprehend the risks to capital”. If all of your money gets taken away, how do you go forward? Now, yesterday didn’t even come close to this kind of scenario, but in the heat of battle, who the hell knows what’s coming next when the market starts to come unglued. “I may not be the “smartest guy in the room”, but I’m sure as hell not the dumbest, and you won’t find me surfing the ocean when a CAT 5 hurricane comes blowing in … “oh dude, the waves you’re missing” … I think you’re missing the point Skippy, I really do”!

Of course, there will be times [days] when the market will make a 6^th low and then come roaring back and make new highs for the day, or something on that order, and that’s why the algorithm allows getting long on signals when price goes back above the 4^th low from the open; so, if price does stage a dramatic comeback, we are all able to try and capture it; when that happens, price will have climbed back up the bell curve, back to normal.

Turning to today’s market … of course we’re higher … Chipmunks got to be fed at the open, what else is new? … what will be interesting today, is the depths to which the PPT will show up and ramp prices higher [maybe, maybe not], cuz if they do, on a Friday at the end of the quarter, things could get real interesting on the upside [yes, really].

First half hour, and you can clearly see the PPT at work … jamming the market higher through buy stops up to 21415 and making you wonder what kind of alternate universe have you walked into the last few days? From a “higher prices later” standpoint & “setup”, this is the worst case scenario for the day … get beat up yesterday and then open higher and try and go higher and fail … would expect nothing less from government types who don’t know Mr. Jack Squat about markets and market psychology.

Some very wicked down action in both the DAX30 and the Dow30, but relatively calm in the SP500; this has made for a very confusing and somewhat volatile trade. Whereas we’ve seen the PPT in the opening minutes, the rest of the day has been clear of anything they’ve done or attempted.

I have increased my trading volumes in this past week, so now we are running around 8X leverage; this is higher than past leverage, and reflects my trading philosophy going forward. With the way the indices are trading today, what with the LP “games and general thievery”, small commissions, and potential slippage, it’s a waste of time to scalp the Dow30; I simply have to “big game hunt”. What that means, is that you cannot compare PAMM results from April, May, and early June [started version 4 algorithm on June 19], with PAMM results from today, tomorrow, or in the future. As I have stated before, I’m looking for gains in the thousands while keeping losses in the hundreds, with the understanding that anything you see from a results standpoint ± $100 or so for the day is basically a “scratch day”; the numbers I’m tossing around while trading make $100 look like “paper clip” change. It doesn’t take but a few points to get that, and with the way the Dow30 trades, and the realities of the marketplace with the scumbag LP, I cannot look to get out of a position with simply a couple of points.

That certainly doesn’t mean I don’t care about the “bottom line”, cuz I do, but reflects the leverage and realities of the marketplace and the PAMM’s intent of making you a millionaire in the future. Before I switched to the version 4 algorithm from version 3, there simply was too high a few losses with too many very small gains, which had I been utilizing the version 4 algo, would have produced significant gains well past 1%.

Now, as I said yesterday, the only way the version 4 algorithm loses money [maybe, not a certainty] is a Dow30 market that does nothing but go down; whether by waterfall or some other way doesn’t matter [like 3 steps down 2 up]. The fact is, we are buyers of the first 4 or 5 consecutive lows underneath the New York open aqua line. From my perspective, I usually use the 4^th low [if it gets there] as my “line in the sand”, where if the market breaks down from there I will not buy any longer until price recovers above that 4^th low and I get a signal from the M1. So, this pretty much has to happen consistently over time, which does not have a very good probability of happening; but even so, the first day the market opens, goes lower and bottoms, and then takes off to the upside 100+ points, the PAMM will capture a lot of this and have a multiple percentage day to the upside. And this ladies and gents, is how I’m trading it.

Even on down days, the probabilities are very high the market isn’t going to be making it past the 4^th low [or the 5^th if you choose]; if it does, you have slid down the bell curve into territory you don’t want to be. OK, but even if/when you get a few of these a year, they still produce rallies off the lows that can be captured, and that is why losing money on the day is nowhere near a certainty. Granted, it’s worse than an up day, but it doesn’t guarantee a loss. So, most times the Dow30, in order to get past the 4^th or 5^th low under the NY open, will have to have a day’s down range of at least 150 points, and more likely greater than 200 points; and in order for the PAMM to consistently lose money, this would have to happen day-after-day well into the future. In the central bank trading paradigm we find ourselves in, does anybody believe with trillions of dollars of financial assets on their books, the central banks are going to sit back and allow this to happen day-after-day?

If it wasn’t for 2 mistakes I made, one with an order ticket and the other with dragging the mouse over the order box, and the 2 screw jobs the last couple of weeks from the LP that everyone knows about, June would have been a profitable month for the PAMM. It is what it is … I’m not cryin’ about it, just sayin’ … I’ve taken measures to make sure the LP never again screws us [which I’m keeping to myself and not sharing], so that’s not an issue going forward either. And finally, since I made the switch to the version 4 algo, it’s nothing but winners and some scratches; so, I’m happy with where we are at from a trading standpoint, and where we are going [which is sharply up!].

Today again, produced a blizzard of trades cuz we had 3 legs down in price for successive lows after the New York open; on the day, when the dust settled, we’re off by slightly less than $100 after commissions, which again I consider a scratch day considering the volume; if we were up $100, I’d say the same thing. If you do the math, we lost a couple of Dow30 points in sum considering the volume. So, buckle up mi amigos, cuz I have started max vol trading, and I fully expect the results to be much better than what we’ve seen; the last 2 days notwithstanding [basically both scratch days] July looks to be a great month.

Here in the last 90 minutes of the day, market is rallying, and while I figured it would show strength from some level in the afternoon because of end-of-quarter buying by institutions, I’m surprised that we find ourselves above 21400 in the Dow30. Going forward into next week, this strength is not healthy considering the declines we saw yesterday. It would be far better if the market had some more selling taking us down to the 21250 -21300 level, and then rallying back. My fear is that too rapid a comeback is only going to produce much more aggressive selling next week. I’m much more comfortable with normal declines, rather than waterfalls into oblivion where nobody has a clue where they stop cuz of the level of panic. In any event, we’ll see what happens next week.

And of course, in order to inflict as much pain as possible on those who are short, the PPT shows up 15 minutes to the close and ramps the Dow30 45+ points to the upside in 10 minutes, thus setting off buy stops in the process and taking us back up to 21435 area. “Why not just ramp it up to new all-time highs at 21560 and get it over with? Why should I have to wait until Monday? … and of course, once they are done, market slides 70 points straight down to lower than where it started 11 minutes earlier. Frickin’ morons … thanks, come again”!

I had also planned to have the PAMM spreadsheet fully functional today; seems the “trade history” function on the MT4 has other ideas. Turnkey is sending me via email, the details of yesterday’s and today’s trade so I can produce the spreadsheet; so far, I haven’t gotten it yet, but the back office said I would get it to me some time today. Whenever they get around to sending it, I’ll post the spreadsheet right here, directly below. It could be tonight, or tomorrow, or even Monday, but I’ll get it posted when I receive it. Onward & Upward!

Time for the beach … dog says we are soooo outta here … until Monday.

Have a great weekend everybody!

 -vegas

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