Thursday, December 8, 2011


                                      Through This Door ……

If you are a trader, at some point you’re going to feel as if you passed through this door into something you wished never existed.

Meet Zeno of Elea, a Greek philosopher, who posed the famous tortoise and hare thought experiment. For those uninitiated, if you want to get from A to B, and go half way each step, you can NEVER reach B.

Although Zeno didn’t know it at the time, what it boils down to is mathematical limits, integral calculus, and discrete functions.

In trader parlance it means this: sooner or later the math will fail you and you have to make a decision that has no mathematical basis. I touched on this in the post “Non Computable Trading”, and its application is the reason I would never “EA (expert advisor)” my algorithm. You will eventually find a problem that can’t be solved without human intervention. This isn’t something unique to my algorithm; it exists FOR EVERY ALGORITHM.

I am, of course, referring to those days even the trading Gods would have a hard time making money. You buy, it goes down NOW; you sell, it goes up NOW. Repeat the process over and over until you feel like Rod Serling is living rent free in your head. No matter what you do it’s the wrong decision and bad goes to worse very quickly.

               Use Your Imagination. What Can Possibly Go Wrong?

You take that first little step and dream up something you think just might get you out of this mess. Losses are mounting, and you need a solution fast. Double up?  Triple Up? “Nahhhh, tried that before in silver and it didn’t work.”

I got an idea! “Yea, sell the Swiss Franc against my long gold position; that’s the ticket!” Gold goes down, the Swiss Franc rallies; you are now doubly hosed. At this point it will take you 6 months to dig your way out of this mess and it’s only 10 AM; still plenty of time to make the situation far worse.

Many years ago I labeled these types of problems as “discrete information packets”.  The “DIP’s”, as I call them, creep into the trading realm when you start to get extremely small price movements that change the buy/sell signals in your decision making. No matter where you draw the proverbial line, you will always at some point, have to deal with the DIP’s.

When you prepare ahead of time, before they appear, you won’t have to guess when time is of the essence. It is because of this, when I initiate a new position coming into the trading day, I will either profit from the upcoming move, or my stop will get taken out. Minute changes in the buy/sell signal around price changes that are very small will not influence my decision.

So tell me, how do you program this into an EA [on the MT4 trading platform] while you are sitting on the beach drinking pina coladas? You can’t, and 3 hours of this and your account is down 30% from chop-chop and nothing has happened. You and Zeno have just gone through the door and are officially in the never-never land of account destruction.

From the trading floor you eventually see every human emotion. I’ve seen the DIP’s cause tears, laughter, denial, and delusion among professional traders. Check the horoscope in the paper followed by a 900 toll call to Madam Zulu for guidance.

                                            It’s Never Easy

You must have the necessary courage to avoid these types of situations. They can easily spiral out of control and ruin your trading account. For some of you newer traders, this may seem patently obvious, so why write about it?

Nobody ever starts the day looking for the Twilight Zone trading door. Successful trading is a process, not a collection of lucky bets. Decide what you do ahead of time and CONSISTENTLY APPLY IT.

Luck is not a variable in “The Vegas BFSG Algorithm”. Remember “The Marble Game?” Las Vegas was built and functions on probability gross margins of less than 2%. The algo operates on much higher probability histories than that. Treat trading as a business, not as a money losing hobby.

Today’s Action & Wrap Up

Yesterday afternoon, I emailed ALL algorithm traders and made sure that they knew the algo had turned bullish and was therefore in “buy mode”. You people out there that think you can piggy-back the signals by what you read in the “Today’s Action” section can forget it. I’m not going to give you enough to be able to do that. It’s simply not fair to all the people trading the algo. Download the algo - IT'S FREE FOR HEAVENS SAKE!

Our first buy signal came at 12:10 AM [Chicago time] at 1738. Stop was placed at 1733.90, just below the low that occurred in the Asian session at 11:20 PM at 1734.62. At 12:50 AM [Chicago time] we got a liquidate signal at 1738. So, here we had a scratch trade resulting in $ 0 / oz.

At 5:45 AM [Chicago time] we got our second buy signal at 1739. Stop was placed at 1735.80. The market then went into melt-up mode.

Now, I am going to reiterate a point that I hope, with today’s action, has been reinforced into the trading part of your brain. I have stated this before so many times, I can’t remember them all. YOU CAN NEVER, EVER TRADE GOLD OR SILVER WITHOUT A STOP SOMEWHERE. NEVER!! Whether it is a stop-loss on a buy/sell new position, or a trailing stop with profits locked in, you just can’t trade without stops.

Some of you have to learn this the hard way, and today was that day if this describes you.

I have the algo coded specifically for those events that have the highest probability of occurring. At today’s high, the algo missed the top. The high was 1756.07 bid on the HotForex platform. It came close at the close of the candlestick in giving the signal, but it just wasn’t there with enough information to justify a closing of the long position. In other words, the math missed it with a “DIP”.

OK, so we just melted up and went over 1750; what to do next? Well, the first thing is to raise my trailing stop, which I did to 1749. Why 1749? Because it is right below the low of the candlestick that went straight up to 1756, and it is the most I’m willing to give up from being long at 1739. In other words, remembering what I have said earlier in this post, I’m not going to risk the gain I have; I don’t care what anybody says I’m not going to watch a good gain become a small gain or a loss. Fugetaboutit!!

I got a ton of emails this morning from algo traders telling me that they got out anywhere from 1748 to 1755. The reason? “Dude, I’m up big money!! I’m taking it!! And you know what? Good for you!!

Now, go code this into an EA! Good luck with that OK?

About the worst trailing stop you could have had is at 1743, just below the low of the candle that started the rally at 7:20 AM [Chicago time]. If you didn’t use a stop, or didn’t trail it properly because you got lazy, then you gave up money for nothing. You simply can’t justify giving up more of the gain than that without being stubborn and somewhat delusional. Who cares about the reasons for the drop off the high. It is what it is!! It’s more than $13 / oz off the high for cryin’ out loud.

Again I say, go code this into an EA! Good luck with that OK?

Today provides the perfect example of the things I have been writing the last couple of weeks. If you plan on being a professional trader, you have to take this post and tattoo it on the back of your eyelids!!

Based on where most everybody got out, and I realize this is wholly subjective, for purposes of reporting algo performance I’m going to go with a liquidation of 1749. Gain on this trade of $ 10 / oz.

Message for Skeptic Cat: “Go eat some grass and throw up that fur ball.”

Since we had a scratch trade earlier, gain for the day is $ 10 / oz.

Ka-Chinggggggggggggggg!!  [Patient Bear must go rest now Mr. Market. Thanks for the memories]

Have a good day everybody.


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