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.
FIRST POSSIBLE COURSE OF ACTION
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.
SECOND POSSIBLE COURSE OF ACTION
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.
THIRD POSSIBLE COURSE OF ACTION
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.
FOURTH POSSIBLE COURSE OF ACTION
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.
-vegas
P.S.
I should have the Replitrader page up and going this week; I
will link to it when it is finished.
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