So, You Gonna Go Pick Some Up Or What?
So far, everything has been on the “theory” side; now it’s time to turn our attention to the “practical” applications side so you can make some outrageous sums of money in the weeks, months, and years ahead.
In the last few weeks, as I have ended my speaking engagements, the most asked question I got was [in relation to Crude Oil WTI CFD (what I call the "energy currency") trading using the long term approach of the “-vegas Big Bang Algorithm], “How much can I expect to make each week, and what is my risk doing that?”
The most potential risk your trading account will face will be near the open of the week as we start trading based upon the algorithm. We always start with the minimum number of units of trading and then work from that position to add additional units at average prices THAT ALWAYS GIVES US POSITIONS WITH PROFIT!
I’ll show how this is done in a minute or two, but let’s now look at profit potential and get a rough idea of what you can expect.
Basically, your profit expectation is the sum of the probability expectations of the event. So, since I know from a long history [the Excel spreadsheet data] what those expectations are, I calculate as follows;
E(profit) = (0*0.20) + (0*0.27) + (60*0.53) + (115*0.06) + (135*0.17) + (210*0.25) + (310*0.52)
E(profit) is the expected profit you will achieve each week over a long period of time if you follow the algorithm.
The red numbers are from the low value of the week.
(0*0.20) is the product of the low value of 35 pips or less 20% of the time which = 0.
(0*0.27) is the product of the low value between 35 – 100 pips 27% of the time which = 0. [Note: Many times we will achieve profit before the market reverses for the week, but I exclude this positive outcome and assume we make nothing to be conservative.]
(60*0.53) is the product of the low value over 100 pips 53% of the time which = 32.
The blue numbers are from the high value of the week.
(115*0.06) is the product of the high value less than 175 pips 6% of the time which = 7. [Note: the average price below 175 pips for the week is about 155. Subtracting 40 pips because our positions are + or – 35 pips from the open and taking into account the spread of 5 pips gives us the correct calculation. I take the spread into account on all red and blue values.]
(135*0.17) is the product of the high value between 175 - 250 pips 17% of the time which = 23.
(210*0.25) is the product of the high value between 250 – 350 pips 25% of the time which = 52.
(310*52) is the product of the high value over 350 pips 52% of the time which = 161.
Therefore, E(profit) = 0+0+32+7+23+52+161 = 275.
Now, considering I took all of the lowest values between a range of probabilities, which lowers the overall expected value, achieving a 200 pip profit for the week is something you can definitely do over time. Naturally, you will have times where your hedges will lose some pips, so this approximate 30% slippage still makes achieving your goal of 200+ pips an achievable reality.
I’m going to use the following example to show how to trade volatility correctly. This is my preferred way to trade the data; obviously there are other ways as well that are more aggressive [like trading every plum/yellow line crossover for example].
Monday’s open starts trading for the week. The vast majority of the time the Asian session will produce no moves worth taking a position, unless there is oil related geo-political news.
At some point, the market will move either + or - 35 pips [bid price], from the open. Let’s assume [in this example] that the WTI Crude Oil CFD opened the week at 99.60 and moves higher in price. You would get long 1 unit at 100.00. We now follow the plum/yellow line for a signal. When the plum line crosses under the yellow line [or the aqua and red exhaustion lines are hit] we need to hedge our position.
Finally, the plum line crosses under the yellow line and the market is 100.70 bid; we sell at 100.70. We now have a long position of 100.00 and a short position at 100.70. The market falls back and fiddles around the 100.25 – 100.45 area.
We only take the short hedge off if the market goes back and approaches or breaches the hedge. If it does, then we close the short [maybe a few tick loss] hedge AND GET LONG ANOTHER UNIT. So, let’s assume we get long another unit at 100.80.
We are now long 2 units with an average price of 100.40 and the market is at 100.80; follow the plum/yellow line [or exhaustion lines] for your next signal.
Again, the cross under takes place at 101.35 some time later; you now sell 2 units to hedge at 101.35. Your long 2 units average price of 100.40 and short 2 units at 101.35. The market falls back and spends some time between 100.80 and 101.05.
On the upside, we do nothing until price threatens the price level of the hedge. If it does, we take off the hedge and get long another unit giving us another average price below the market and a long position in a rising market.
If the market reverses during the week and price loses 300 or 400+ pips, the long positions become your hedge to your short positions at higher prices. In this way, we NEVER have to worry about reversal, double reversal, or even triple reversal weeks.
We simply are playing the numbers according to the volatility data with hedges [putting them on and then taking them off] until we get our open unhedged positions 200+ pips for the week and then we stop and go live life; meaning of course that you will have a slew of 3 and 4 day weekends throughout your trading career.
If you are more aggressive and want to trade the whole week, that is fine except to note that at some point after you net 200+pips, the plum/yellow crossovers will most likely fail due to the fact the market has limits as to how much it usually goes up or down in a week. What we are taking out in profit, we know is going to happen with a very high degree of probability.
From this example you should be able to extrapolate long and short positions with the appropriate hedges. If you can’t watch the market from European open [about 1:00 AM Chicago time] through the afternoon U.S. session [about 2 or 3 PM Chicago time] then stay hedged until you can, If you miss a move, then live with the consequences. Remember, opportunity is infinite, losses are now.
Throughout the week, I would stay hedged through rollover [there are no fees (or vig) with CFD’s like there are with FX pairs] and the Asian session. Obviously, if there is news to warrant otherwise, I would consider taking off the hedges on a case-by-case analysis.
Most of the time [over 50%] you are going to see reversal weeks of some kind and duration: fine, it’s no problem for us. We simply use our initial positions [that we thought were going to be profit] and make them the hedges. In every case, when we add multiple units, we are in a position of profit. If we lose, we are not losing initial capital but profits gained during the current week. At some point, the market is going to move where the probabilities say it is going to go, and you are going to be there with an unhedged position larger than 1 unit to take profit. [Note: one other point needs mentioning; if you don’t have enough capital to do multiple units, don’t sweat it. Trade and build your account until you can.]
So, your winners will be on MULTIPLE UNITS and your losses will be on 1 unit. MAKE MULTIPLE THOUSANDS, LOSE HUNDREDS!
Obviously, you can build this kind of analysis with any other CFD [stock indices, spot gold, spot silver, etc.] or FX pair of your choice. The numbers aren’t nearly as good as WTI Crude, but I know some people just can’t handle more money, and convince themselves they are an expert in EURUSD [or pick anything else], so they go down that road.
This is a pretty straight forward conservative approach that captures the volatility I know is there for the taking; aggressive traders can up the ante, so to speak, by any number of various other factors like following every plum/yellow crossover while unhedged. I don’t think you need to do this, and take on more risk than necessary, but it’s up to you and the nature of your trading.
I always love to hear from readers, so I would really appreciate your feedback. Please send me any questions/comments at firstname.lastname@example.org.
Have a great day everyone.