CRITICAL THINKING IN TRADING

ASKING THE IMPORTANT QUESTION: “How many holes need filling in your trader head?”

I had the best of intentions of linking up the October DOW30 data to the website last night, but for one small problem; when I got back from the beach yesterday, showered, ate dinner and fired up my laptop, what do I see but about 15 emails in my inbox covering every subject imaginable. From the time I turned on the machine to when I finished replying to all of them with a personal response, it was time for my beauty rest [“and you know how important that is, right?”] So, I’ll get the data up and linked tonight.

The main reasons damn near all of what you see [and sadly, for some of you, have paid for] about trading “systems”, trading “methods”, or trading “algorithms” is complete junk are a combination of the following; 1) they are not thought out from a “top down” philosophical or logical line of reasoning to get to dealing with a very specific finite set of priorities in trading, 2) they are put together using “back fitted” historical data under the best of trading conditions [like straight up/down] to give the least “regression mean” to losses while favoring profits, thereby insuring at the first hint of increased intraday volatility you will lose money, 3) no mention or thought is given to the limitations of the method, when it will turn sour, or what to do when it happens; and believe me it will happen, 4) priorities are intentionally set to maximize profit and pay no attention [or very little] to risk tolerance or the size of losses when they occur; you therefore could have 10 winning trades in a row and the 11^th trade shows your account down 20%+, and last but certainly not least 5) who is it exactly that is the author of the code and what are his/her “street creds” in trading that should make me want to investigate my time and do the necessary research to see if it’s “legit”; and by extension of this do I have to send a shipload of money off somewhere to get even the janitor in the building they are supposedly in to talk to me and answer some questions I might have?

Well, unless you find yourself in “Willy Wonka’s Chocolate Factory”, I can pretty much assure you money is going to flow from you to them before anybody will even say “Hi”; and what happens after you send them money? Can you get it back when you find it’s all bullshit based on Soybeans back testing when there was a drought and prices sky rocketed? “Sure, and I can get you Super Bowl tickets on the 50 yard line 5 rows up totally cheap; sound good?”

So, what I have done is pretty much eliminate the money equation; and that should have your brain cells working overtime to critically evaluate and eventually asking the all important question, “well, if there isn’t any money involved, then if his algorithm is bullshit and doesn’t work, why would he go to the trouble of ‘putting it out there’ cuz there isn’t anything for him to gain but people who think he’s full of shit; it doesn’t make sense.” AND MY RESPOSNE: “What took you so long?”

Right now, I have “affiliate” programs with 2 brokerage houses; 1) ASSETS FX [Finland], and 2) LMFX. ASSETS FX is now only for NON U.S. Citizens, and LMFX is open to anybody. Both have the very best conditions for spot gold [traded in 1 Oz. increments] that you will find; I have a suspicion that they both use the same liquidity provider bank because their quotes during the day [bid/offer] are right in line with each other almost to the penny after round turn commissions are factored in at ASSETS FX. Currently ASSETS FX has the better DOW30 CFD by a very slight margin, but for American clients that can’t have accounts there any more, LMFX is about as good as it gets for trading.

At both houses, when you open a live trading account through the website and my link, you become an “affiliate” account of mine; what that means is simple. 1) You get better service if there’s a problem with your account cuz both houses know I will be on their ass like “white on rice” if something isn’t taken care of like it should be; both have felt my wrath before, and both know I carry some weight in the trading community and don’t want the negative publicity criticism from me attracts to them, and 2) as everybody should know, both the brokerage house and the LP make their money off of the spread in any market; while we pay “retail”, they offset our positions in their books “wholesale” and pocket the difference. The most common practice is for them to split the spread 50/50, but it doesn’t have to be this and in some instances there could be other factors at work as well that determine what the final split actually is.

When you trade and the brokerage house gets their “cut”, they kickback to me part of their spread profit for bringing your account to the brokerage house; it isn’t much but it adds up. My affiliate clients do not have any spread that is different than anybody else; whether you are an affiliate or not makes no difference to your “net” cost of trading.  What I’m getting from the brokerage house is simply part of their cut.

Now, the way I look at this is as follows; it’s a net win for everybody involved. The brokerage house gets increased business, the client [you] pays nothing for the algorithm and has no expense whatsoever, and Yours Truly pockets a little coin for his efforts. In essence, the brokerage house is paying your algorithm fees. If everything is bullshit, then I get no clients and if I have clients they will eventually lose money and go away, so I end with nothing for my efforts; why would I want that?

Turning to gold today … ahhhh, the Chuckleheads traders in Asia just couldn’t help themselves could they? … had to rally it by about $8 back up to yesterday’s high so the dealers & bullion banks could stuff it down their throats … “seriously, do you traders over there ever look at your P/L and wonder WTF is going on? Cuz from where I’m sittin’, I’m amazed any of you have any money left from the ‘pounding’ you take practically every night I’m asleep. And, oh boy, the open today is going to do exactly what I wrote about yesterday; sell stop heaven for the commercials!”

From earlier in the day, a lower exhaustion move in late Asia that had the algorithm make for a very nice buy signal; the selloff and subsequent trade directly below.

Half an hour into this today, and all I see is some light short covering from the big drop overnight in late Asia and European sessions.  But what has me worried is that Asia went sharply lower; and you all know what that eventually means for New York [Hint: up from the lows].The daily calculated white horizontal line is $4-$5 above the market from where it stands right now, meaning we need a waterfall of some kind [hopefully a lower exhaustion move] to get long; we should get another selloff here once some shorts cover, but with an already $21 range, I’m wondering what’s left to the downside to get that to happen? Again, remember Asia and what happened and what I have always said.

And as I write, we just got an upper exhaustion move @ RM=1; this should be the “last gasp” of final short covering. The chart directly below.

EXIT QUESTION: How good was the algorithm in “nailing” this high? “Still wanna talk to me about ‘randomness’?”

Oh wait … you want more “randomness”? How about the second move to the upper exhaustion lines? Oh, and what a surprise … it touches the exhaustion lines and then … what? … anybody got an educated guess out there? Directly below the second up exhaustion move of the day.

“Hey Mr. Market, how ‘bout showin’ a little love out here for us traders waitin’ for an exhaustion line hit LOWER! Gooooooood, it’s like I’m asking for the F-ing world here or what?” [Patient Bear is patiently sitting and waiting … show patience & discipline grasshoppers!]

So, 2 and a half hours into this clusterfuck and gold is reverse correlating almost to the tick with the SP500 and DOW30; both indices have been down 9 days in a row, and with the ever idiotic “most important evahhhhhh!” NFP report tomorrow morning from the Bureau of Unicorns & Fairy Tales, I’m just a tad surprised we didn’t see an early short covering rally in both which would have sent gold lower [maybe] into the lower exhaustion lines for us to buy.

We could still get stocks to rally late in the day, but I doubt seriously gold is going to “tapioca” itself into the lower exhaustion lines; just not enough players that late in the day to want to trade to give it that “oomph” that we need for exhaustion. And, trader thoughts will start to converge on the NFP report and markets morph into “position squaring” which is almost always a bucket of slop up and down with no clear trend to speak of and/or take advantage. It looks to me like a wasted day in gold.

Newbies may want to know so I will address this point; when the price is below the daily calculated white horizontal line, the only way we get long is through a waterfall drop in price. We don’t get long on a plum line slope change when plum is under yellow; why not? Simple answer: the probabilities aren’t high enough to justify a trade with above average profit expectations. But remember this; the primary goal of the algorithm is to keep your trader ass out of trouble. After it does this, then you can go for profits in a long trade with probabilistic scenarios that are definitely in your favor; in other words, I trade when I’m the casino, not the customer.

Sometimes, like today, the market goes counter to all of this, and the lower probabilities prevail; it happens, so what? Opportunity is infinite, capital is finite!

Oh, but looky here; the market has crossed the white horizontal line on the upside, and then subsequently backed off, and when the plum slope line changed, we got the day’s first buy signal. Again, like yesterday, I’m not thrilled about getting long up here, but when the algorithm says “buy”, I click the damn button. Below, the day’s first [probably only] trade.

I have no intention of getting “stuck” up here, so once I’m up over a buck in this thing, my fingers become very quick looking for the “close position” button; if it wants to continue to climb minute-after-minute without pause, be my guest. But once the previous M1 closed, and the current M1 on this chart went immediately red, I liquidated; I’ll take the approximate $1.50 and rejoice, because an hour or so ago I didn’t think we would be up here for a trade, and it was looking and feeling like a nothing day. At least it keeps the dog in bacon. [To the Mrs., this is a “rounding error”.]

Once this trade is over, I can feel things slowing down; the M1 candlesticks are getting smaller in range, and prices are more “disjointed” from one bid/offer quote to the next one; “folks, we’ve just moved into the ‘position squaring’ for tomorrow’s NFP stupidity part of our show today. Please have fun in getting whatever position you want to get 15 cents outside the bid/offer before it goes against you 60 cents in a heartbeat.” Thanks, but no thanks … I’m done today … Mr. Market, do whatever the hell you want.

It’s cloudy and rainy here today [wait … what?], and so the dog and I will be watching “Too Cute” on Animal Planet that comes on about 3-ish … he keeps looking out the window and sees it drizzling rain, then at me as if to say, “hey boss, WTF is this shit I’m lookin’ at outside? No beach? Aw man … life just ain’t fair!” But, when I grab that T-bone steak bone I got last night from the steakhouse, and give it to him while we’re watching puppies frolicking around on TV, he’ll be in heaven. Until tomorrow … I’m outta here.

Have a great day everybody!

-vegas

OPEN A DEMO AND/OR LIVE ACCOUNT AT THE LMFX LINK IN THE “DOWNLOAD LINKS” SECTION OF THE WEBSITE TITLED “OPEN TRADING ACCOUNT – DO IT NOW!”

 

RANDOMNESS FOOLS EVERYONE

WHO KNEW? “GANN DID; BERT DID; I DO; HOW ABOUT YOU!”

Over the weekend, I had the experience again [for the umpteenth time] of meeting someone who is absolutely convinced that people “like me” can’t exist; “it’s simply not possible cuz markets are random in nature, and nobody can beat “randomness! How can ‘you’ explain this phenomenon?” [“As if it’s my obligation to defend my career & proven trading results to somebody that starts with a faulty premise; but, it’s the weekend and I feel like playing with this guy who doesn’t yet know I’ll be leading him into the biggest logic trap he’s ever seen.”]

I start by replying, “I’m reasonably sure you must follow some market; are you familiar with gold or the DOW 30 index?” And he says, “Yes, I watch the Dow every day almost; it’s crazy how it gyrates! Gold I watch occasionally, when it’s in the news, but stocks in the Dow I follow pretty much daily.” “Ok, then let’s talk about the Dow since you’re more familiar with it”, I say and then continue, “does the Dow just go ‘straight down’ or ‘straight up’, any day when you’ve watched it, for the entire day?” He says, “Well not that I’ve seen; sure, there are big up and down days, but I don’t ever recall the index going ‘straight’ in one direction for the whole day; it’s just F-ing nuts most of the time; it’s up 70 points and then I go grab some coffee or something and come back and it’s unchanged or vice versa; it looks and feels to me like a mess is going on and most of the time I have no understanding of why it’s doing what it’s doing. One day ‘news’ is bad and it skyrockets, the next day the ‘news’ is worse and it plummets. I just don’t see how it’s possible you make money doing this?”

I pause for a second or two and then say, “You do know you can ‘trade’ the Dow 30 index as a futures contract or as a CFD?” He replies, “Yea, but I don’t understand the mechanics involved … had a broker once try and talk me into opening a trading account to trade the stock indices, but I didn’t do it. But yea, I know they exist and you can make money if you guess right, but Christ when it goes against you … man the losses can be horrific.”

I pause again with him and finally say, “Do you believe in cycles? You know, the cyclic nature of things?” And he says, “No not really … just ‘mumbo jumbo’ for the masses; besides, they’re so unpredictable.” [And this is where I know I have him right where I want him.] I say, “So, your wife has no monthly period?” “For God’s sake man, what’s that got to do with anything?” “It’s a ‘cycle’ isn’t it?” “Well yea, if you want to get technical.”

“And since you don’t believe in ‘cycles’, you’d buy a farm in Iowa and plant corn in December too right?” “Ok, I see where you’re going …‘those’ kind of cycles sure … because you can see them and modern society knows they’re real … the ones you are inferring, not only can I not see ‘em, there’s no basis for them to exist so why should I believe they are real?”

Now for the kill; “Well, I can’t see ‘X-rays’ EITHER and for the life of me have no reason to know why they exist, but they most definitely are real and can kill you if you’re careless with them, just like markets like the Dow 30 or gold. Mathematical cycles or vibrations most definitely do exist; ever hear of a ‘sine wave’ in electronics? How about ‘elliptic wave’ cryptography that keeps military websites and computer networks safe from hackers? You yourself just said a minute ago that the Dow was ‘nuts’ and ‘gyrates’ a lot during the day; are these not mathematical cycles playing out before our eyes with big changes in momentum and direction? And by the way, that just happens to describe vector calculus, so I guess in your world that is meaningless and doesn’t exist also? [I’m on a roll, and I can see he’s starting to squirm a little, as the logic of my argument is eating away his armor.] I will be the first to admit, my algorithms build upon others in the trading field’s successes; most notably W.D. Gann and my mentor Bert, WHO JUST HAPPENED TO HAVE MADE ‘MILLIONS’ THEMSELVES, and can’t have possibly existed except that they did. Together, with what they taught me plus my own original research into ‘exhaustion’ moves, I have about the highest probability you will ever come across of making consistent money from trading; oh, and I been doing it since before you were born!”

AND THAT ENDED THAT! [“Go ahead, go get some shrimp off the barbie and grab a cold one; I know what you’re doin’; it’s Ok.”]

Imagine taking Gann’s ‘Square of Nine’ and printing it out on rectangular paper that was the size of an acre [43,560 square feet] with a starting level of ‘1’ and just going from there until the entire acre of paper was filled with cells; take a crane and lift the starting number of ‘1’ into the sky, and the acre of paper becomes a pyramid made up of 4 triangles bordering each other with a square at the base. And the 4 corners of the pyramid going up to the apex in the sky are the ‘cardinal cross’ numbers. From what I can gather from limited information, this was discovered by him on his 10 year [1909 – 1919] “fact finding” epic journey to the middle east & far east; think of this, 10 years gathering research for trading traveling the “far reaches” of the globe to dusty and long forgotten libraries in Cairo, Beirut, Istanbul, Bombay [Mumbai], Peking [Bejing], & Bangkok to name just a few.

Gann died 3 years after I was born; I was introduced to his work by my mentor Bert, who I had the distinct privilege to study under for about 3 years at the brokerage house we were both at before heading to the trading floor in Chicago. Gann is extremely cryptic and hard to understand from his writings; he doesn’t give you anything, he makes you work for it by going down blind alleys. Give any “Newbie” any of his work [you pick ‘em], and the first words out of his/her mouth will undoubtedly be something along the lines of, “I don’t understand this … where’s he going with this? … how does this tie in to buy/sell signals? … Mercury? … wait … what? ... what the hell does Mercury have to do with pork bellies? … ephemeris tables? … what the fuck are those? … nodes of the moon? … arcs? … 45° angles? … screw this I’m outta here!”

Bert was totally a “physicals” commodity guy; lumber, cotton, & corn were the big 3 he traded; here I was, and all I was interested in were gold, silver, interest rates, and currencies; I had no interest [intellectually speaking] in the markets he was trading, but came to “see the light” in his approach using Gann’s principles. Week after week Bert piled up some huge profits, and changed me from “skeptic” to “total believer” in 3 years time [actually a lot less than that].

Many readers know that over time, I have made adjustments to my original floor trading algorithms; the last major one being in early April of this year. With the tremendous changes in the nature of the way markets are trading now [i.e. greater HFT volume and much greater Central Bank manipulation], it was time for a “total re-write and examination” of the trading algorithms. From this, the “volatility algorithms” [gold, DAX30, crude oil, & soon to be DOW30] that are available for download [free I might add] were born. I can categorically state, the changes I made have been highly profitable.

For example, take the DOW30 on Friday; the FBI announcement on Cankles emails caused quite a stir; directly below, the DOW30 M1 candlestick on the MT4 with algorithm overlay, after the “knee jerk” selling that ensued. At this time, the market was in “buy mode” from the rules of trading this market.

The white arrows are buy signals from the plum line slope change from negative to positive when the plum line is under the yellow line; notice how close to the bottom of the move these signals are. The blue rectangles are of course exhaustion hits for liquidation; can they realistically be any more precise and “on target” in real time for you in getting out? This isn’t just a rhetorical question; find me anything else [in real time] that can come close to this.

Of course, for the last 6 months+ it’s no secret to me; the volatility algorithms for XAUUSD [spot gold] & DOW30 have almost perfectly mapped algorithm exhaustion behavior in both markets, and outside of “Brexit” [where things got more than a little nuts with RM=4 moves the norm for a couple of days], some FED interest rate decision moments, and of course the idiotic monthly NFP reports, I don’t see anything that even comes close to the algorithms ability to make money on a daily basis with a very low risk profile, that you can get your hands on and use to your benefit. Oh, and it’s free; go figure.

Crude oil is still doing well, but volatility has dropped since summer, making it tougher to make money. The DAX30, outside of some days where the market has actually put in a somewhat decent range [150+ points], has seen intraday volatility crater; and if you think I’m getting up at 2 A.M. to trade this and see miniscule ranges and volatility stare back at me … well, it ain’t a happenin’! Which, don’t get me wrong … this shit happens in markets, and when it does you leave it alone until it comes back. As it stands right now, it looks like gold and the DOW30 are ready to return to higher intraday volatilities; coupled with the fact they are U.S. based markets and can be traded during the business day, makes them ideal candidates for trading and making money.

FX? Don’t get me started with how totally fucked up this arena has become; 1) 24/5 market pairs with absolutely no preference to any of the three 8 hour sessions [Asia, Europe, U.S.] to make violent moves quickly and hurt traders with no subsequent follow through, 2) total lack of risk control over your account where stops mean nothing, and 3) because of the first 2, volumes are off 30%+ from 2 years ago, making liquidity and slippage an issue like never before. These are the reasons hedge funds large and small have left the trade or gone out of business in record numbers. I’m not working on an FX volatility algorithm, and I don’t expect the future will see me back here anytime soon [that doesn’t mean “never” though].

It’s 6:30 A.M. here in Paradise; the “impenetrable bacon box” has been successfully penetrated, so breakfast has been a success and the dog is happy cuz he’s eaten roughly half his weight in bacon and roast beef already; it’s that day again, and I feel like the pic directly below.

“Seriously, why can’t these markets open at 11 and close at 2:30?”

Amazing what caffeine does after your second cup of coffee; turning to gold today … well, looks to me like the Friday afternoon “Cankles Blitz” caught some serious short players off guard and trapped them into submission before the weekend … nothing like a Friday to squeeze people who stay at the party just a little too long. Not much range overnight in Asia and from the looks of the HR1, the Asian Chuckleheads traders seemed like they didn’t want to play starting the week off with more uncertainty than I can remember in a long time. Not much of an argument you can make to be aggressively short here … right now uncertainty plagues this market [and others as well], and as we saw on Friday, [not if] when another shoe drops from Wikileaks or the FBI, or even some other source, that causes “concern” for the political process and equity markets react, gold is going to react with it; until things settle down some in that regard, it seems to me the “safe” side of gold is to be long on breaks into the 1260’s. Of course, the algorithm will tell me what to do, but from a “macro” sense if I was a commercial seller, I would be somewhat hesitant in pushing prices lower at this moment.

On the other hand, Friday’s short covering burst could be seen in a longer term view as “capitulation” by the “Johnny Come Lately” crowd who had short positions at less than advantageous prices; just the kind of necessary market action dealers & bullion banks look for before they actively attempt to push prices lower; we’ll see who wins [besides us that is!].

Here at the 8 A.M. open, market appears “soft”; looks and feels like I’m going to be waiting for some kind of “waterfall” sell off to get long; this could be a long day. Half an hour into this today, & it’s Chicago PMI @ 9:45; maybe that will move this some, cuz it’s “chop city” from where I’m sittin’.

Well, there goes 4 hours of my life I can’t get back; what a bucket of slop gold is today. The good new? The DOW30 had some good buy signals that made profits; they didn’t turn out to be exhaustion moves, so I’m not going to show you the charts because you don’t have the manual or tutorial for the DOW30 yet, and I don’t want people losing money trying to “reverse engineer” the process and infer that all the rules and signals for the DOW30 are the same as that of gold. They are different, and if you “do it wrong”, the trading universe is a cruel place.

So, no trades today in gold, as the market spends pretty much all day under the daily calculated white horizontal line and we haven’t seen any type of waterfall action on the downside that would get me long; whaddaya expect with a $7 daily range? Ughhhhh. I’m so outta here, you have no idea … until tomorrow.

Have a great day everybody!

-vegas

OPEN A DEMO AND/OR LIVE ACCOUNT AT THE LMFX LINK IN THE “DOWNLOAD LINKS” SECTION OF THE WEBSITE TITLED “OPEN TRADING ACCOUNT – DO IT NOW!”