Sunday, October 27, 2013


                       Does The Market Know Your Middle Name?

Think of any market [Oil, FX, etc.] as an empty balloon. When the week starts on Monday, air starts to go into the balloon; as price starts moving up and down throughout the week, the new highs and new lows that are put in make the surface of the balloon expand and get bigger. The increase in surface area is volatility.

We know from the historical data what this probabilistic weekly volatility will be, and so we set out to capture it with the algorithm.

When I do speaking engagements I almost always bring up and ask attendees to give me a show of hands for those who started trading and then blew the account up when they got in trouble; and yes, there are a lot of hands in the air!

                                       Watching People Trade

The main premise of the “Long Term -vegas Big Bang Algorithm” is the singularity of the weekly open. If the algo is followed, there simply is no room for big “trouble”. All of the logic and mathematical “brain work” has been done; the probabilities calculated and analyzed; our risk defined; the MQ4 file visually plots [on the 5M candlestick chart] the exhaustion and yellow/plum lines respectively; it’s all there for you to see in real time.

Over many years, unless a market has a paradigm change that diminishes its usefulness as a viable financial derivative [e.g., short term interest rate futures because of the Fed’s ZIRP], its inherent volatility can be mapped and taken advantage of, IF [and this is a big if] you can reduce risk and stay out of big losing trades.

No matter how you want to characterize a markets personality, it really boils down to 2 states of being; normal and excitable. The yellow/plum lines and the crossover rules that apply to them in the algo really do a good job of mapping normal behavior; the aqua/red exhaustion lines guide us when price action goes into excitable mode.

Once a position is established [usually Sunday night or Monday morning], most often we are then guided by the behavior of the yellow/plum lines. How you choose to handle this “behavior” will ultimately effect your profit potential. No matter what you do, your action in this regard will fall into 1 [one] of 4 [four] courses of action; choose the one that best fits your risk tolerance, personality, and the time you can give the market to trade.


You do nothing. You know there is an approximate 94% probability of the week’s high/low being at least 200 pips from the open, and so when the 35 pip threshold is breached you take a position and stick with it and ignore everything else. 6% of the time you live with the consequences, whether that is a loss or smaller profits.

Personally [and this is just me and not necessarily you], I reject this option because I absolutely can’t sit there and watch a 150 pip profit turn into a breakeven [or losing] trade; I’d be climbing the walls looking to hang myself from the ceiling fan.


You hedge [or liquidate] on every crossover.

I personally reject this scenario because the Asian session for WTI is notoriously choppy when there is no oil related news in the marketplace; your account most likely is going to get “chopped” with a thousand paper cuts before anything of substance happens.

Last but certainly not least, let me know how staying up and alert to what the market is doing 24/5 works out for you. Send me a photo of yourself on Friday morning.


You are un-hedged and have open positions when the week’s high/low is expanding; the subsequent crossover of the yellow/plum lines you hedge and keep them on until the high/low continues to expand.

This is a conservative approach to the algo and limits your trading to those times when the week’s high/low is expanding to where we know it must go according to the historical data. However, you have to be there when that happens, so unless you are prepared to be in front of the computer screen for upwards of 16 hours a day until the week’s range is put in, when you miss a move it’s going to impact your weekly results.


You choose the times you are un-hedged with open positions and follow the yellow/plum line crossovers during that time. If you miss a move so what? Opportunity is infinite!

This is the option I choose to trade my own account along with the Replitrader.

The aqua/red exhaustion lines are calculated using standard deviations from a time sensitive mean, in conjunction with Fibonacci numbers and ratios, to give us price areas [in real time] where the market has a high probability of stopping or reversing.

Currently, WTI Crude Oil CFD has a risk model [RM] of 1 on the 5M candlestick chart.

There are 4 RM’s in the algo; if you find market price continually breaching these lines on an intraday basis [aqua for slightly more conservative traders, and red for slightly more aggressive traders], simply adjust the RM from 1 to 4, or 4 to 1 depending on what action is taking place.

These exhaustion lines [aqua or red and any RM] are for hedging positions and NOT for reversing positions. The purpose of the lines is NOT to pick tops and bottoms; the purpose is to cover open positions and give us maximum profit potential via historical probability.

I want to be very clear here; neither my algorithm nor Vampire Squid’s HFT with 20 million lines of code can eliminate all potential losses from trading. I can’t eliminate all losses from the hedges, and not every yellow/plum line crossover is going to work.

Let market price = A, the yellow/plum line crossover = B; if the market makes a move up or down, you will absolutely get the proper appropriate crossover, so we can say with certainty that A = B.

However, we cannot say that B = A. Why? A crossover does not make a market move higher or lower. Markets are not mathematically commutative. So, we live with potential small losses to capture the volatility we know is there.

Big trouble is not for me, but for those who structure their trading activity ignoring probability and volatility in any market they choose to trade. There are no moral victories in trading.

Have a great day everyone.


I should have the Replitrader page up and going this week; I will link to it when it is finished.

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