Thursday, March 15, 2012


                            Kinda Like Trading Sometimes Isn’t It?

Over the last several weeks, I have either mentioned directly or indirectly the single biggest killer of trading accounts since stone-age Neanderthals traded Wooly Mammoth bones. I am of course referring to what I affectionately call “The Flying Wedge of Death.” [FWD]

Every single trading day of my life, since I started trading professionally back in the day, starts with a worry that today may be the day the FWD shows up and pays a visit. I have seen more traders destroyed by this than any other single market event.

Lately, meaning the last couple of months, the FWD has shown up more than usual, and so today I have decided to spell it out in more detail.

Below is today’s 5M candlestick of spot gold from about 1 A.M. to 11 A.M. [Chicago time]. The highlighted blue squares are new highs or new lows [or test of the low] for the approximate 10 hour period. The red trend line on either side forms “The Flying Wedge of Death.”

What makes this type of trading so hard, is the fact that you have two competing camps [bulls and bears] slugging it out via prices, and neither one is winning. You get caught up in this, and don’t recognize it for what it is, you run the very high risk of constantly losing trades and in the process watching your stops get hit and then reversing smartly.

You have a profit for about 10 seconds, and then the market reverses swiftly and goes to your stop. Having cleared out stops, and becoming convinced the market is now headed the other way, you flip from buy to sell [or vice versa] and within 15 – 30 minutes you get hit again. Rinse and repeat, and now you have real losses that have clocked your account by anywhere from 20% - 50%. Having fun yet?

So, how can we steer clear of this type of trading? What conditions exist that allow this type of trading?

Well, one never knows with 100% certainty, but my radar went up with the late after hours rally yesterday. Add to that the usual ‘Lemmings in Asia” a few hours later, and you just had a stealth rally of about $15 during the lightest volume part of the day.

What it means is that when the “meaty” part of the day commences [Hint: Europe & U.S. sessions] you’re going to have traders on both sides of the market who can’t wait to “take advantage” of their particular bullish or bearish view of the market. Welcome to “The Flying Wedge of Death”, where neither new highs or new lows will have any follow through and will swiftly reverse course to the middle range.

Of course, it is easy in hindsight to see this; not so easy as it unfolds in real time. When it ends, and one of the camps throws in the towel, you get what happened between 11:30 A.M. and 1:00 P.M.; a $20 straight up rally.

If you got chopped up in the FWD, you needed the $20 rally in 90 minutes to make back the money you lost in the previous 10 hours. No thanks.

If I were to place the algorithm over the above chart, extremely rapid price changes basically negate the effectiveness of the signals. In the 10 hour chart above, gold had 11 5m candlestick bars $3 or greater with only an approximate $12 range AT ITS WIDEST!

Given the above conditions, waiting for signals is not the way to go; you have to bale at the slightest hint of a price correction. Remember, you have the dealer spread to deal with along with slippage when they don’t really want to take the other side.

There were plenty of days on the trading floor where it felt like you couldn’t get an uptick to save your life. The market closed for the day and you would go home thinking gold was toast. You walk in the next day and it’s called $15 higher on the open, and you want to go out and stand blindfolded on the Eisenhower Expressway.

It happens, and what you have to do is not take it personally or think some higher life force sitting in the nearest galaxy is getting a big chuckle.

Going forward, given the fact the market is putting in moves in off hours, I may trade these hours. The downside of course is that you might be in a position for hours at a time if things slow down. If it happens, just deal with it.

I hope this helps some of you and that no matter if you use my algorithm or not, you can keep an eye out for this particular type of trouble.

Have a good day everyone.


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