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Wednesday, November 15, 2017

“SLOP OPERA”, PART DEUX

“Do I trade GBPJPY or mop the floors? Paradise can be confusing”!

Remember that element in the “periodic table” called “Oy”? … yea, me too, and it’s yet another day of the “Flying Wedge of Death” [FWD] in GBPJPY. Where do I start with this POS? Ok, first the Japan data dump & then the China commodity carnage … all of which quickly led to Yen appreciation, Cable doing nothing, and the cross sliding quickly … once that’s over, it’s “dullsville” to the European open and the release of some Cable data on employment, where once out, USDJPY broke out to the downside on SP500 weakness, along with European stocks, and GBPJPY went south quickly yet again.

Well, we’ve seen the script to this movie before, haven’t we? Sell stop rips to the downside, and then no follow-through whatsoever … pick any day this week, of any move greater than 30 PIPS, and with multiple attempts to rip stops [and wasn’t that mystery tick low today of 148.081 a thing of beauty? … next millisecond it’s 148.21 bid, and blink your eyes and it’s 148.30. Somebody got a new donkey courtesy of a bunch of scumbag LP’s, and got their sell stop filled at the low, only to watch it rally 50 PIPS within about 10 minutes.

And so, once again, for the third day in a row, it’s the FWD killing accounts with abandon, and once it nudges up some, it dies and starts sliding back on disappointment it can’t hold any rally. No comfort to those short, of course, who for the 4th day in a row see blistering rallies come out of nowhere to literally blind-side a position; hang around a second or two too long [pun intended], and it gets ugly when buying a rally to get out. All-in-all, from the European open, it’s approximately a 70 PIP move down on data, a 5 hour plus clusterfark  “chop-fest”, and then a rip higher to get back the 70 PIPS [“Oh, never mind that drop, OK”?]. And of course, no follow-through to the rally, and we find ourselves right where we were 10 hours ago, the only difference being a shipload of accounts poorer for the experience.

All of which leads me to a comment from yesterday’s post, where “Anonymous” asks if the FWD might be here to stay, and so, maybe it should be considered “normal” and therefore can we plan for it and profit from it? A great question, but one that needs to be looked at in terms of probability theory for the correct answer.

As I have repeatedly stated, over time [months, years, decades] EVERYTHING HAS TO HAPPEN; “the “crazy” double reversals, tiny Doji’s, and 1000 PIP moves; it’s what makes up the “tail risk” portion of the probability distribution “bell curve” on both ends, from the insane ranges to the tiniest Holiday “chop-fests” you shouldn’t even be watching. They all come up at some point; EXIT QUESTION: WOULD YOU CONSIDER FLIPPING A COIN to make a trade? If the answer is no, how come? … it will go on “winning streaks” won’t it”? Ok, so how come you don’t want to do that? Of course, cuz you know the “luck” of the flip won’t last, and it will have some lovely losing streaks as well, that you know you have to avoid.

My entire trading career has been one where I have actively sought out the LOWEST probability occurrences in trading, and as my mentor Bert used to say, “choose the form of your destruction”. In other words, don’t let the market destroy you; you pick how you get hurt or lose money, and then by how much. This is trading by “your rules” and not market happenstance. Well, the form of my destruction [not in a literal sense, but metaphorically] are very low probability events that sneak into trading now & then; you have to know what they are and what to look for, and then sidestep them.

The FWD tends to “cluster” in markets; we’ve seen it 3 days in a row in GBPJPY, and then it’s just as likely it won’t be back until 2025, not counting Holidays. The problem in trading it, is that your potential reward for this low probability event is LOWER than the exponential risk you take by fading the trend while it’s under the 50% retracement line; you may think you’re only risking 7 PIPS, for example, when in reality it’s more like 30-40 PIPS. Simply look at todays lunge lower to 148.081 for the low; that low was put in from 30 … a stop at 23, and you’re filled at 08 … you don’t lose 7, you lose 22. Add ‘em all up, and the times the market works out for your risk taking, and you’ll need every penny to make up for the shellacking you take on the other 80%. Problem here is twofold; 1) you won’t save the money, you’ll spend it, so it isn’t there, and 2) what happens when you lose 10 in a row, and get a little “gun-shy” on trade #11, or #13, or whatever [pick a number]?

The fact of the matter is, from a statistical probability standpoint, reversals [or those very close] don’t have a very good track record at extending gains once they blow out the dealer order books … there simply aren’t any others that want to play at the new prices … and that leads to everybody being on the wrong side of the trade at exactly the wrong time, and it leads right back to the middle of the move … sometimes slowly, sometimes violently.

Hindsight is a wonderful technical indicator … it’s easy to look at an M1 chart, see the turn, see the buy signal at say 35 [from today], and get long and start counting the money in your head … what you’re not seeing is getting long at 35 on that signal, and the bottom falls out of GBPJPY and we head lower and take out 148.081 in 15 seconds on our way to 147.75 on sub 148.000 sell stops … your sell stop gets filled … natch, at the bottom … and now, the market can rally back to 148.500 and piss you off to know end. What looked so great has turned into a 60 PIP loss on something seconds before looked like gold. And that’s the position you put yourself in, when you make trades like this … cuz the reality is most of the time it’s going to be the loss, simply cuz the range isn’t that big; if we were staring at a 150 PIP range, then use the “special indicators” rule in the manual. Now, you’re back to being statistically positive in getting long.

Remember, when you trade any crosses that are non-dollar denominated, “it’s not what you profit that matters cuz it will take care of itself; what matters is what you don’t lose by getting whacked; you simply have to seek out, show patience & discipline, and wait for the proper trades. Randomness has a way of making you think a “trend” is starting to develop, and if you buy into that “trend” [here, that would be the FWD, and trying to trade it], what’s going to happen is that you will get mauled for the reasons I’ve already stated".

And I hope, my answer gives some insight into what the proper procedure is when you see the FWD start to develop; “sure, a lot of traders will disagree with me on this … that’s fine … what I know, and what I’ve seen over my career when it comes to the FWD, is that more people have returned to the “Pudding Business” cuz they’ve gotten literally destroyed on a “do-nothing” day … buy the short-term highs multiple times, and sell the short-term lows multiple times, looking for the volatility breakout via a larger range that doesn’t come; all on bigger volumes and leverage with each trade … “cuz damnit!, this time it just has to work”! … and of course, it doesn’t and it’s “buh bye” Skippy”.

Today’s action saw the range put in with that “mystery tick” of about 123 PIPs, from the Asian session high to the U.K. employment numbers low. For GBPJPY, you need to see ranges above 140+ PIPS before you even start to think of potentially buying near the low, or selling near the top; and you need one of the two candlestick formations off the bottom/top in addition to that. Unfortunately today, like Monday & Tuesday, have seen sub-par ranges; if you buy/sell to soon, i.e. on a smaller range, you run the very real risk of getting your stop loss hit and getting filled someplace that sees a loss way more than you envisioned when you took the trade. When you view trading as “avoiding risk”, instead of “where’s my profit”, you find yourself in a much better position.

In what can only be described as a “senior moment”, today’s trading saw me get short 0.05 lots … wait, what? … flying through the order ticket, I thought I had clicked on 1.0 lots for volume … apparently, I missed the mark, and clicked the volume right above 1.0 lots, and that’s 0.05. So, you can thank me for the $0.42 later. “And if you put me in the “home”, just make sure I get the strawberry jello with bananas and whipped cream … cuz if I get the lime jello with pineapple bits, I’m breakin’ out”!

I’m outta here … until tomorrow. Onward & Upward!! PAMM spreadsheet directly below.


Have a great day everybody!

-vegas

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