TEACHABLE MOMENT

“Be careful Skippy; you know what happens when you don’t pay attention!”

It’s early still today, and tomorrow sees economic data being released in the U.K., but so far the weekly candlestick of GBPUSD [with important commentary], which is directly below, tells you all you need to know to understand this disastrous week of extremely low volatility, and the effect it’s having on the “Scalper’s Algorithm”. Take some time, please, and understand what it is you’re looking at in the chart below.

The chart above covers about 110 weeks, going back to September 2015, with the exception of the “Orange Arrow A”, which is a mistake on the chart, the 9 white arrows cover the worst volatility weeks in the last 2 years and 2 months; only one of these is a Holiday week, and that was Christmas week back in 2015, the rest all scattered throughout the year. What does it say, when this week [so far] is 20% below the worst week of the last 2 years 2 months? Well, either SHTF sometime today, or tomorrow, or this indeed will be the worst week by far in years.

Ok, so what does that mean? Well, if you remember what I wrote in the “Scalper’s Algorithm” manual, I said something along the lines of, “if you follow the algorithm, there’s “almost” no way you can’t make money over time”, and I went on to explain the “almost”. Basically 2 scenarios must play out; 1) central bank [CB] manipulation like you see in the stock indices, which have literally ruined those markets for trading, and/or most importantly 2) a lack of volatility, which places the M1 algorithm signals on top of each other. And this week, so far, this has “played out” in spades, and makes algorithm signals much less statistically advantageous to take, simply cuz the market isn’t going anywhere. It’s a back & forth “chop-fest”, with LP’s feeding on stops and front running corporate order flow … for them it’s an early Christmas … for the rest of us, it’s a clear danger signal. All you need do is look closely at the M1, and literally 5 -15 minutes go by with M1 ranges so tiny, it makes you wonder if the MT4 is malfunctioning … and then BOOM! … a 5 -25 PIP move on nothing but “vapors”. And, it is a hallmark of choppy, illiquid markets that you see this type of action, with the then noticeable lack of any follow-through … rinse, repeat, and it can be a real “account killer” cuz it inevitably leads to the “Flying Wedge of Death” [FWD], a professional trader’s worst nightmare. I’ve seen in my trading career, so many people get “carried out on a stretcher” from nothing days and weeks, that go “nowhere” and do nothing except get you to buy short-term highs & sell short-term lows multiple times. At the end of the day, you add it all up, and nobody can believe how much money you lost, including yourself. These 9 weeks I’ve highlighted at the start of today’s blog are the most dangerous weeks of the last 2 years 2 months!

From an algorithm standpoint, it can be summed up, quite nicely, by today’s reversal from the high … hitting a new low … everybody gets short looking for stops under 1.30800 to get them profits … and then BOOM! … here comes the nasty spikes up catching everybody off guard. What this leads to is what I mentioned yesterday or the day before; a market where the 121 & 183 EMA’s can’t “sync up” with the 5 & 9 signal generator, and the market goes up when the trend is down, and then the market goes down when the trend is up; simply put, nothing works, and the reason it doesn’t is cuz there is no daily or weekly volatility for the market to play off, and thus impact the M1 signals, and/or give us the necessary market moves to liquidate with profit before they spike the market the other way in seconds. Plainly, I’ve just described “chop”.

Looking at today’s M1, directly below, and a picture says a thousand words; 3 algorithm short signals that don’t work while the 121 & 183 EMA’s are clearly negatively sloped and telling us there is negative momentum in the market; but that doesn’t matter to a market that isn’t going anywhere … all it does is produce chop, and that usually produces losses … and by the time everybody figures out that maybe the market will go higher … it moves down and traps retail specs yet again. Traders sold the 90’s & the 80’s, covered at 00 & 10 area, and get long at the 20 area … now what?

And so, my point today is a “teachable moment” for situational awareness in volatility and how it impacts everything … and I do mean everything, we do as traders. Without it, we’re all “dead meat”!

And even looking at the worst 9 trading weeks of the last 2 years 2 months, none of them are nowhere near close [except Christmas week of 2015] to the pathetic range, so far this week here on a Thursday, of a paltry 119.8 PIPS. Something has to give here soon; all of the 9 weeks highlighted, preceded some good volatility weeks in their respective aftermath. But I will mention once again, why it is critically important to not get “whacked” in these slow weeks, and end up doing “stupid shit” chasing PIPS that aren’t coming or aren’t there cuz volatility is so low [at the moment] … trust me, it will come roaring back soon!

Two examples for you to “ponder” and think about today; the first is, “I am guaranteed a 300+ PIP range each week in GBPUSD … I’ve spoken with the trading Gods, and they have assured me 100% this is the case going forward … of course, nobody but me knows this”. Well, if this was a 100% certainty; within a few years, I would have all the money in the world from trading, simply cuz I could start at Monday’s open and position myself for whatever happens, knowing it will probably go in my profit direction until the range for the week is 300 PIPS, where I would take profits and stop trading … I couldn’t lose if I tried!

The second example is the opposite: “the trading Gods have told me GBPUSD will not have a weekly range over 120 PIPS going forward; again, I’m the only one who knows this”. Now, though, every time the market approaches either extreme of the range I take heavy positions the opposite direction and thus profit handsomely; again, within a couple years, I have all the trading money in the world.

The first example, is plainly “trees growing to the sky”, and the fact that volatility will always be there to bail you out; the second is the opposite, where you fade volatility at every opportunity. Both, when they don’t work, will kill your account, especially the first with large stop moves against you in seconds, and the second with the “drip, drip, drip” of losses accumulating as you prepare to trade the expanding weekly range, which by the way never comes!

So, the bottom line is this: “unless you are willing to literally bury your account in the “trader’s graveyard” at some point [this week, next, a year from now, what does it matter cuz it WILL happen?], you have to have the discipline and patience to “walk away” from these weeks when they start unfolding themselves to you with no action by Tuesday or Wednesday. That is the time to pay attention, and if Thursday’s or Friday’s action isn’t expanding the range to “normal” levels, you have got to back away and say no thanks”. And really, who wants to “bury”” their account?

Sadly, though, this is what happens to most traders; instead of “reading” volatility and reacting to it, they try and impose their “thinking” on it, and end up either trying to fade increases in volatility, where the stop hunts will kill you, or they’re increasing leverage looking for volatility to increase, and when it doesn’t, the illiquid trading conditions exacerbate the fill you get from the scumbag LP; in neither event do you have any chance of long-term trading success.

Specifically, I want to address what I call the “Newbie Disease”; the logic of which has as its base a totally flawed premise; namely, a very tight range will continue “tight”, so he/she can short the top of said range and buy the bottom of said range all day long for big bucks, with a stop slightly over/under the range so the potential damage is minimal. “Ummm, yea, that ain’t gonna work, cuz your stop will get pummeled unmercifully, and your risk is at least quadruple what you think it is. Worse, are those who simply ignore stops, cuz as we all know it’s in a tight range and has to come back, who 7 minutes after a 100+ PIP move against them, are staring at a 50%+ drawdown in equity of their account, and all those 1 – 3 PIP winners aren’t there to carry the day, cuz you spent them already on your “trader lifestyle”. So, you win 15 and lose 1, and you’re down 50%+ … that’s the problem with fading volatility, and thinking tight ranges will stay tight … they won’t, they don’t”!

Turning to today’s market … well now, “that escalated quickly in Japan didn’t it”? Nothing like the highest Nikkei stock index prints in over 20 years, and then 2 hours later almost 1000 points in the hole [860 to be exact]. Of course, “Peter Pan’s “Plunge Protection Team” [PPT] got right on it, and by the close had rallied the index back up. Still, markets as they say, were “unsettled”.

With that said, the Nikkei getting “monkey hammered” should be Dollar bearish, and sure enough Cable is rallying from late Asia into the European open; $64,000 question is, can they extend the weekly range, or is some kind of reversal in the cards? And what about the “Brexit” talks? It looks early on like new highs are in the cards. Ummm no actually, how about a nasty reversal off the high and straight down to yesterday’s low, taking it out by a PIP or so, just to get the retail sell stops of course … and then rallying it smartly about 36 PIPS.

First trade of the day, and I’m reading the algo signals, and I get a buy signal up near the high … “OK, the high for the day so far is 1.3152-ish; the weekly high is around 1.31774 … the probability is still high that this range gets taken out; 119.8 PIPS is very, very low … at this moment, I know that if/when the market goes back up to test the high from late Asia, it has got to do something quickly … any farting around … up/down a PIP or fractions, and I’m looking at a 3-10 PIP move down in 1 second when it comes … sooner or later somebody “whacks” this stuff if it can’t sustain any rally. So, when it got above 1.3151, my thought is it has to MOVE RIGHT F-ING NOW TO NEW HIGHS AND THEN GO HIGHER STILL … if it doesn’t, it spells trouble … and guess what, we got the trouble … after failing and before the plunge, I liquidate with a meaningless, small profit. No winner-winner chicken dinner here”. Again, like yesterday, I don’t see the point in posting a pic of the trade … simply a signal of dubious value, in a tight market, about ready to reverse and go to the lows.

And then the stop-hunt induced frenzy to new lows … from which every spec in the world gets caught short and is forced to pay up. If the market could have busted 80 on the downside, I probably would have sold a small rally, but barring that, all I could see was the dreaded FWD and all its horrific manifestations. So, until something happens, there isn’t any way I’m getting sucked into this mess. It is what it is, and none of us can change it, until its time … and we don’t decide that.

Ok, I’m hearing now that the “presser” over “Brexit” is to be tomorrow morning [Friday] in Europe, between the U.K. & E.U. negotiators; coupled with economic data, this is gonna make for an interesting Friday … buckle your seatbelts … any break above 1.3177 or below 1.3057 and it could get very nasty going into the weekend.

Early afternoon in New York, and the FWD clearly present in Cable, with a few shorts getting new donkeys carved with a chainsaw, free of charge from the dealer community; after you lose 15 PIPS in 4 minutes, tell me how you plan to get it back going forward into the New York afternoon, cuz I’d really like to know “Plan B” here; especially now knowing the Brexit presser is tomorrow morning. And, like all predatory markets, SHTF early tomorrow with a data dump, and the “comedy show” of the EU vs. UK, where anything can happen. Some “fireworks” shortly after 1 P.M., and taking a look at the M1, this is what happens to stops … first the sell stops, then the buy stops … all-in-all about 40 PIPS for the round trip … If you were on the wrong side of this, good luck in making it back now. “I rest my case”.

Please don’t anybody misunderstand, I don’t like getting up in the wee hours and watching paint dry either; however, I hate losing more, so it’s wait ‘til tomorrow and see what the cat drags in, in terms of news … it is what it is. Just glancing at the computer screen, I can see that the FED’s ‘Plunge Protection Team” [PPT] is now out and bidding stocks higher … we’ll see if it holds through to the close; I guess some folks were “unsettled” after all with Japan, what with the 30+ handle range in the SP500 on the downside; Cable now sliding slightly with the rest of FX, as the panic stock selling seems to be over. Oh, won’t tomorrow be fun.

Over this coming weekend, I plan on doing the data for USDCAD; both the weekly going back to 2012, and the 8 hour from January – August 2017. When I’m done, for those interested, I’ll post it Sunday night over in the “Download Links” section of the website. View it online and/or download from my shared files folder at box.com. All files are in PDF (Adobe). Until tomorrow everybody … I’m outta here. Onward & Upward!

Pamm spreadsheet directly below.

Have a great day everybody!

-vegas

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