States Of Volatility
Back in the day, when trading pits ruled the world, I had a
clerk who stood outside the pit and did all of the early algo calculations for
me. I got her access to the pit, and she would literally bully her way through
walls of guys, twice her size, to get to me and give me info.
My first trading floor algo’s had no risk models [RM’s]
attached to them. Although I was well aware of the different states of
volatility associated with the various financial markets [FX, gold, and S&P
500 futures], there was no specific formula I followed for 2 very big reasons;
1) calculations were already burdensome for my clerk, and adding further
non-linear differential equations to the mix would have probably killed her,
and 2) I could literally feel the difference in the pit when they occurred. You
didn’t need for anybody to tell you things were magnitudes of order
bat-excrement crazy.
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Are We Still Golfing Buds?
A funny thing happened between about 1999 – 2003 that
changed the paradigm of trading forever; the internet and specifically
high-speed internet. Initially, the exchanges [specifically the Criminals Marketplace Exchange]
whole-heartedly supported electronic trading because they thought it would
further enhance pit trading [and by extension more business for the “Chicago way” politically
connected corrupt broker groups and their bagmen].
What they didn’t see was that in a
very short period of time it would send pit trading to the dustbin of history. Enter
the electronic era and all that goes with it.
Now, we got ourselves a different
ballgame, and so how do you construct and get a readout of the volatility [in
an electronic trading platform environment]] that you can use and be effective
in making money?
There were problems to overcome
that came from literally everywhere. What platform to use? Can I get reliable
charts? Can I code these charts? What code to use? This is just the tip of the
iceberg here, and so you get the idea.
Finally, a duo of Russians got
together and came up with Metatrader. Originally designed for brokerage houses,
it very quickly became the de facto trading
platform for individuals because of a) its flexibility and simplicity of
design, and more importantly for many of us, 2) you could code your own trading
signals through the mq4 [basically Java] language.
When I was just a young skull full
of mush in the late 70’s, apprenticing under Bert, I was introduced and
influenced by the works of Gann, Elliot, and Fibonacci. Back then nobody had
computers and everything was done by hand; colored pencils, chart
paper, all the math, and the final product was usually a pain-staking chart
that took many hours to make and great discipline to update in real time.
I spent a few years [in
semi-retirement because I was playing golf every day of the week] solving all
these problems and finally got it figured out to my satisfaction sometime in
2005. I intuitively knew that electronic markets would be almost impossible to
scalp, therefore when my first exhaustion model was introduced to the public,
via the internet, it was titled as The 1 Hour Tunnel Method.
In the 8 years since, all of the updated –vegas
algorithm versions have had the original exhaustion formulas included in them, and to
this day is one of the only REAL TIME
TECHNICAL INDICATORS THAT CAN GET YOU OUT OF EITHER SHORT POSITIONS AT THE
BOTTOM OR OUT OF LONG POSITIONS AT THE TOP, THAT YOU WILL FIND IN ANY ALGORITHM
NO MATTER THE COST [FREE OR MUCHO $$$].
Since trading absolutely mirrors life, why shouldn’t physics
[and by proxy advanced math] be our guide when it comes to acceleration
[traditional Newtonian physics] and quantum mechanics?
What we get are “quantum jumps, or states.” There
is no gradual increase [or decrease] in volatility; what we get in trading are “jumps”
to different trading energy levels in a heartbeat, that last until the fuel runs out [buying/selling as acceleration], and then
the market jumps back to normal just as quickly.
Kind of like water; you have 4 states that can exist. Depending on
molecular activity [volatility] you can have ice [RISK MODEL=1], water [RM=2],
steam [RM=3], and plasma gas [RM=4].
In the various mq4 files that are available for free in the “File
Download Links” section of the blogsite, all of the various market mq4 files
have the exhaustion lines [aqua and red] plotted automatically in real time
with 4 different RM’s that you can click back and forth [in about 2 seconds] to
see, in real time again, where the market is at volatility wise.
The aqua exhaustion line is for more conservative traders, the red line for more aggressive traders, or you can use the "tunnel" between the two. In essence, it's an area of exhaustion that probability [based on historical price data] tells us cannot be sustained for much longer. Therefore, a perfect place to exit.
Each market [i.e. XAUUSD, the CFD for WTI Crude Oil, and ALL FX pairs] has its own personality risk models based on Fibonacci ratios that are specific to it. Therefore, using the gold mq4 isn't going to mean anything plotted on an FX pair or with crude oil. Each mq4 file is specifically designed for its named file.
Spot gold [XAUUSD] has recently been trading in RM=1 mode,
so the candlestick 5M chart is in that mode. On Thursday of last week we got a jump up, and
looking at the chart what do we see:
XAUUSD 11/7/2013 RM=1 Exhaustion
So, what we see here is the market rushing up to the
exhaustion lines, where if you were long you would immediately
liquidate [I didn’t say initiate] your position. Once the longs were trapped,
you saw violent action to the downside 40 minutes later where it violates the
aqua and red lines on the downside [if for some reason you were short this would
be getting you out].
Then comes Friday and the NFP. Here is the 5M [with RM=1] from
Friday:
XAUUSD 11/8/2013 RM=1 Exhaustion
Notice here how the gap down went way past the RM=1 model;
what does this mean? It means the market is at a new energy
state. With the click of the mouse here is the same chart with RM=3:
XAUUSD 11/8/2013 RM=3 Exhaustion
Notice the low of the move ends almost exactly at the aqua and red
lines.
If the algo had us short, a quick click of the mouse would
have shown that this was the end of the move and time to get out.
THIS IS THE POWER OF THE
EXHAUSTION LINES!
I intentionally coded, with visual reference, these 4 states
of volatility to help you figure out very quickly where the market is at in
regards to volatility, so that you can use this information [in real time] to
your advantage and get out at the very best price when the situation warrants.
Use this to your advantage!.
Have a great day everyone.
-vegas
P,S.
To enlarge one of the exhaustion charts to fill your screen, simply place your mouse on the chart and click. It should then fill your screen for better viewing.
