Wednesday, January 4, 2012


                               Making Something From Nothing?

What makes chicken bones art? And what makes them just a pile of useless, worthless chicken bones?

Oh, I know you sit there at your computer and agonize over the formation and eventual function of your charts. What to do and when do I do it?

The algorithm frees us from having to deal with this issue. And when we do have to deal with chart issues, they are always from the standpoint of profitability and not from deciding how big a loss to take.

So, when we find ourselves in one of those “DIP’s” situations, the worst case scenario for us is an opportunity cost and not a real loss.

There is another important issue I am going to address today, because it has shown itself in the gold market. I have intentionally been waiting to address this issue on a day that manifests itself in price action. I am specifically referring to intra day volatility.

The algorithm is designed to “catch” the move of the day if it is consistent with the medium term flow of big money. When volatility lags early in the day, especially after the first move has been made, we are faced with some decisions to make, regarding trading. For these past weeks, the daily ranges have been quite large on an historical basis. Asia in particular has been putting in $20 + ranges before Europe even opens.

So, after today’s move that the algorithm caught, the market broke rather sharply back into support, but within the range set in Asia and very early pre-Europe. If the market is to be consistent with its recent daily volatility range, then we can either expect additional highs or lows in the hours ahead of us today. Since we are now closer to the daily low than the daily high, and we expect the daily range to increase, we are faced with a non-computable problem regarding taking new long trading signals.

It isn’t a question of whether to take a new signal [long or short]. That is never the issue. The issue is whether to continue trading for the day or stop since we caught the first move out of the box and made $4 / oz gain. My stated goal each day is to make $5 / oz. trading, but that is entirely an arbitrary number as far as the gold market is concerned. Gold cares neither for my wishes, not asks my opinion before it moves.

I have always been a relatively conservative trader who absolutely hates giving money back to the market. I therefore am faced with a non-computable problem as to whether to take my gain and go home or continue trading with a new signal that is likely to be a loser since we are closer to the lows than the highs and volatility is expected to make the market a new range. We came into the day in “buy mode”, yet since we got out of our first trade a winner, there have been 2 buy signals coming from the break that either are in danger of losing money or have lost a few bucks depending on where stops were placed. Not a big deal either way you cut it.

But I hope you see the issue here, because as a trader these are the kinds of things you have to think about before they happen. Fact is almost all of you will give it no thought until the market forces you to think about it.

It’s an easy decision for me to stop trading for the day because of 2 variables: 1) I know my goals and money objectives are arbitrary, and 2) I’m already up more than “The Power Of $1.50”. So, worst case scenario is an opportunity cost for me and not a real loss. I did my job; I caught the first up move of the day while the algo was in “buy mode” I didn’t make as much as I would have liked, as the algorithm got us out prematurely [in retrospect], but a gain nonetheless that if sustained every day would make me filthy rich over time!

As I said in an earlier post, I concentrate on volatility NOT price action. And from where I’m sitting right now, I see 1) a market that is closer to the lows than the highs, 2) an algorithm in “buy mode”, 3) an expectation of a further expansion of the days range, and 4) no price bounce off the break from earlier today. It’s simply not worth the risk of taking a new buy signal and risking what I have already made. I’m stopping for the day.

There is a big difference between “cherry-picking” signals and making a decision not to trade. The former gives you nothing in return for your efforts, while the latter preserves profits after the first move of the day.

Today’s Action & Wrap Up

As stated above, we came into the day in ‘buy mode”, and our first buy signal came at 12:10 AM [Chicago time] at 1599.00. Stop on this trade was placed at 1595.50. At 1:25 AM [Chicago time] we got a confirmation top at 1603. This liquidation is discussed in the manual and Appendix IV. Gain on this trade was $ 4.00 / oz.

In light of what I said in the post above, we stopped trading for the day and took our profits and went home. Not enough for a Ka-Ching, but money in the bank nonetheless.

Gain on the day of $ 4.00 / oz.

Have a nice day everyone.


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