Friday, January 13, 2012


                                        Not This Kind Of DIP

I have written before on the problems we encounter in trading with DIP’s [discrete information packets]. It basically falls under the problems you encounter with non computable trading.

What I mean by “DIP’s” is that we are always faced with those issues where the math from your algorithm is very close [pennies or fractions of prices] to changing from “buy” to “sell”, back to “buy”, then “sell” again, etc. all in a very short period of time. No matter how sophisticated or simple your trading method is, you have faced these issues or soon will if you are brand new to trading.

Most new traders make the mistake of assuming that these issues only come up every “blue moon” or so. Not so.

Standing in a trading pit with other professional traders, almost every popular idea you can dream up has been discussed and dissected by the trading community. What used to amuse me to no end was some guy telling me that today’s trading couldn’t happen, or that the move we saw last hour should only happen every 50 years [based on standard deviations] but since yesterday [when he came up with the idea] it found its way to today’s trading . All within 24 hours of being “discovered” don’t-cha-know.

And it just so happens that after this “amazing” discovery, we all were lucky enough to witness it the very next day!! Why, we can now assume that since this only happens every 50 years or so, we can go ahead and bet the ranch tomorrow because absolutely no way could it happen again so soon. Until it happens again tomorrow afternoon.

“Err, Houston, we have a slight problem over here.”

Where traders make the proverbial million dollar mistake is when they incorrectly assume all they have to do is redo the numbers [to take into account the new “abnormality” they found] and everything will be OKEY-DOKEY.

They will discover soon enough that they face the very same problem with the “new numbers” that they did with the “old numbers” and the only thing that has really changed is that they are now caught in an ever-expanding cycle of “exceptions” to their rules.

If they are lucky enough to still have an account in 2 months, their algorithm or method has enough special rules to fill a 2 terabyte email server. I’m sorry to inform you new traders of this, but you can’t get there from here.

So, wherever your calculations lead you, you still face these pesky “DIP’s” in your trading. You can never escape them. Deal with it, will you please?

And so, how do you correctly deal with it?

Analyze the scenario and then make a human decision. After that decision, you move on and forget about it. You don’t do what most traders will do, which is change everything so as not to lose $1.98. Move on and remain true to whatever method you decide to trade. Believe me, if your method, or algorithm, isn’t that good the market will remove you from trading long before you may wish to stop on your own.

As I have written extensively, you must accept the fact that we deal in probability distributions, not event certainties. Know how to correctly enter a trade and then how to analyze your liquidation scenarios.

It is the true nature of trading.

Today’s Action & Weekly Wrap Up

We came into today in “buy mode”. As has happened every day this week, all the good action on the upside has happened in Asia, outside our trade initiation time window. Some days it came a few hours earlier than Midnight [Chicago time], other days just a few 5M candlesticks before Midnight.

I’m not a woulda-coulda-shoulda type of trader, but if we hadn’t gotten “DIPed” all of the week concerning timing of entry at Midnight, this week would have been a massive profit center for the entire year. But, it is what it is and we deal with it and move on.

Our first buy signal didn’t come until 6:05 AM [Chicago time] at 1639.00. Stop was placed at 1635.90, just below the most recent low at 1636.65. The market moved up from here, eventually getting as high as 1643.45 bid.

Now, as I have clearly stated in my other posts in the past, and here in the trading action section, if I get up on a position [the concept of the “free trade”] of more than $4 - $5 / oz. on a trade, there is absolutely no way this is becoming a loser. I simply don’t care about the algorithm [mine or any other] when it comes to this point. This is basically a fail-safe mechanism to avoid disaster; not only financially but emotionally as well. I don’t know how I can be any clearer on this concept.

As a trader, money is the only thing I care about on a position. My algorithm is more than great, it’s fantastic, but regardless of that fact, I’m not going to stand in a pit, or sit at a computer and let winners become losers. As I said yesterday, not in my universe you don’t!

If I’m wrong, it doesn’t matter. OK, I’m wrong – so what? I can get back in again later.

So, I hit the liquidate button as we dropped below 1639.50 without any signal from the algorithm. I got filled on my market order slightly above 1639.00 for a profit of a few pennies per oz. Whoop-de-whoop, but you know what? I don’t care, and I’m not thinking about anything but preserving capital from a winning trade and making sure it isn’t a loser. End. Of. Story.

So, basically for reporting purposes it’s a $ 0.00 gain on the trade.

Our second buy signal came at 9:45 AM [Chicago time] at 1631.50. I placed the stop at 1627.50. From entry, the market rallied up to1635.67 bid before backing off some. Now, since it’s Friday and I’m in no mood to get caught in anything that can lose me money now that I am up a little money, I’m basically looking for the algorithm to get me out higher with a signal. However, barring that, if we get back down to 1633.00 bid I’m hitting the exit gates and taking my $1.50 and go home and call it a week. If it happens, then it happens and I deal with it if the market races higher from there.

I know “The Power of $1.50”, and with this second trade getting me in a profit position this late in the session, if the market forces me to, I will take it and go home. I don’t want to get out prematurely and let a better profit get away from me, but this late in the day the worst that is going to happen is that I make 
$1.50 / oz.

[Always keep in mind that as nice as it is to make $ 7.00 - $20.00 per oz per day, the market is more than likely NOT to accommodate your wishes. I have already proven that with proper leverage, $1.50 / oz / day can make you filthy rich.]

At 10:30 AM [Chicago time] I raised my stop to 1634.00. Why? Because from here I don’t want a reversal taking the market lower and giving up profits. At 10:55 AM [Chicago time] I raised my stop to 1635.50. It’s Friday people, and I’m scaling up my stop for better profits waiting for a signal from the algo.

At 11:15 AM [Chicago time] my stop was taken out at 1635.50 for a profit on the trade of $ 4.00 / oz.

Considering the first trade was basically a scratch, gain on the day of $ 4.00 / oz. Like yesterday, not enough for a Ka-Ching, but enough to buy a refreshing beverage at the beach and be happy.

Weekly Wrap Up

Monday           $ 0.00
            Tuesday           $ 2.00
            Wednesday      $ 5.00
            Thursday          $ 5.00
            Friday              $ 4.00      

Total For Week            $ 16.00

Running Total Since November 1, 2011

November 1, 2011 – December 31, 2011        $ 306.00
1/01/2012 – 1/06/2012                                    $   11.00
1/09/2012 – 1/13/2012                                    $   16.00

                                                Total                $333.00

A tough week of trading. Although the algo scraped out profits, if you are a new trader, or didn’t exactly follow the algorithm, you probably didn’t do as well. Welcome to trading.

Have a good weekend everyone!!


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