THE DATA HAS NO AGENDA, PART V

                      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 vegasalgo@yahoo.com.

Have a great day everyone.

-vegas

THE DATA HAS NO AGENDA, PART IV

                                     I Can Afford Catnip Now!!

There are some very important key points I want to go over before I start with the different scenarios. I explained in an earlier post what the definition of the “low value & high value for the week are and how they are calculated respectively.

There are 3 very important points I want to stress.

1) The statistics generated by the “low value” is what I use for determining our hedge positions and the statistics generated by the “high value” is what I use for determining profit potential. It is important you understand this, and after I present the key scenarios, I think you will clearly see why this is so important.

2) I also want to stress the importance of following the red and aqua exhaustion lines, as well as the yellow and plum line buy/sell signals on the 5M candlestick chart once we start to trade when the horizontal opening line threshold is breached. It’s really pretty simple; no matter what you think, the market isn’t going to rally higher unless the plum line is over the yellow line, and similarly the market isn’t going to break down lower unless the plum line is under the yellow line.

When exhaustion lines are hit or breached, you must either hedge up or liquidate your position. Yea, sometimes markets keep going, but more often than not it’s very near the end of the line for the move, at least for a little while.

[Note: The mq4 file for crude oil is now listed in the File Download Links under "VBB Crude Oil mq4". Download for free, or if you have any trouble contact me at vegasalgo@yahoo.com and I will send it to you ASAP.]

3) You have 2 options when it comes to hedging; either do it or don’t. I like the idea because it forces me to act when market conditions warrant instead of sitting on the sidelines hoping for a rally or break to get back in the market. If you don’t want to hedge, then simply open new positions and then liquidate when appropriate.

All of this means of course 1) you have to follow the plum/yellow line signals once in a position, 2) you have to be aware of the exhaustion lines for liquidation or hedging up, and 3) you have to be aware that the +35 pips from the open down to -35 pips from the open is our “no mans land” for trading. Inside this zone we are either flat or hedged up.

When [not if] we get a reversal week, our new position becomes effective at that 35 pip threshold.

Our goal each week is simple: net out 200+ pips per week.

If you are more aggressive, then simply follow the signals to the end of trading for the week on Friday. Me? I like to live some – I’ll take the 200 pips and go enjoy life; whether it comes on any particular day I don’t care.

SCENARIO I:

Looking at the “low value” statistics [i.e. raw data], I know that approximately 20% of all the weeks in your trading career, the market will open on Monday and NOT go more than 35 pips from either the eventual high or low of the week. Therefore, in this easiest of scenarios, there won’t be any weekly reversal moves and it should be a relative straight shot to the high or low of the week. Whatever the side, I’ll be on it, and if I trade correctly [i.e. hedging properly] I’ll get the 200 pips.

Why am I so sure?

According to the data, 77% of the time the high value will be greater than 250 pips for the week. Now, these are odds I can embrace!!

SCENARIO II

I also know from the data that slightly over half the time [53%], the low value for the week will be greater than 100 pips. If I trade correctly, that means I’m going to make money on the low side value [before it turns] AND the high side value as well.

I’M GOING TO MAKE MONEY ON BOTH SIDES OF THIS VOLATILITY!!

Again I ask, what’s not to like about these kinds of odds? Seriously, somebody "enlighten" me and show me where you can get probabilities like this from any other market.

SCENARIO III

According to the data, a little over a quarter of the time [27%] the low value for the week will fall between 35 and 100 pips. Now, I will either a) make a little money on the low value side, b) lose a little money, or c) basically breakeven.

Who cares? I’ve still got a 77% probability scenario for 250+ pips on the high value side.

Oh wait a sec ……… I’m shooting for 200 pips not 250 pips. In that case I’ve got a 90% PLUS PROBABILITY PERCENTAGE [91.24%] WORKING IN MY FAVOR!!

Seriously folks, I’m not really into what floats your boat, but when it comes to trading markets and making this market your own personal ATM, I don’t know how it gets any better than this.

I’m going to give you 3 pieces of advice to take very seriously; 1) don’t be greedy and stupid with your trading [because a week is a long time], 2) set aside at least 10% of your winnings to grow your account [see “-vegas For Life” file for details if you haven’t already], and 3) as you win set aside a rainy WEEK fund for those “tail risk” weeks that eventually must come some day.

Next post, I’m going to show you how to make your losses very small relative to your winning positions. I used to have a saying when I was on the floor; “Lose hundreds, make tens of thousands”.

Have a great day everyone.

-vegas

THE DATA HAS NO AGENDA, PART III

                                            Trading Is Life

I want to begin with the premise that some decent amount of volatility will be present in the marketplace; without it, why even trade? One look at the weekly candlestick chart of WTI Crude Oil CFD should convince you that, yes indeed, it is there.

By the same token, we don’t want to see much of this on a weekly candlestick chart:

Now, if both the high and low “spindles” are at least 150 – 175 pips apart, we still have a high probability of profit for the week. Only if this type of spindle is small [125 pips or smaller] are we going to see the probability of loss increase dramatically. Since the start of 2010, this has occurred 1 time in 194 weeks; add in the very high volatile period from 2005 – 2009 and you have 1 time in about 8 years. If this doesn’t excite you as a trader, I don’t know what will.

But, as the old saying goes, “you don’t get somethin’ for nothin”. When it comes to trading Forex and/or CFD’s, you can never have an algorithm that makes money under all trading circumstances; you have to give up something [potential losses] in order to have the possibility of making money.

What we “give up” is a low volatility trading environment over the course of a trading week. Sure, we care about price because that is the benchmark for making money; but what we are really trading, and what we should really care about is intra-week volatility.

We start the week on Monday at the open [Forex-Metal server time 00:00; 6:00 P.M Sunday night Chicago time in Daylight Savings Time, 5:00 P.M Central Daylight Time the rest of the year]. We then place the horizontal line [choose your color] on this open, and it will remain there for the current week [delete and change for new week] as a visual reminder of higher price [green candles] and lower price [red candles] values for the week.

When the market is in a range of +35 pips to -35 pips from this horizontal line [open] we do nothing and are not in the market. The majority of the time at the start of the week, unless there is some news driven event, the oil market will most likely do nothing in price terms until the European open [around Midnight – 1 A.M. Chicago time].

When the market rallies over the +35 pips from the open we establish long positions; when the market breaks under -35 pips from the open we establish short positions.

After establishing a new position, we then follow the yellow and plum lines [5M EMA LOW VALUES – 3 PERIOD FOR PLUM, 9 PERIOD FOR YELLOW], and also the exhaustion levels [AQUA AND RED LINES], to determine when the market may be changing short [or even long] term direction.

However, instead of liquidating out position, we HEDGE it with an offsetting position, until we are given a new signal, at which point we take off the hedge.

Since we are highly confident [over 90% to be exact] that at some point the high or low of the week will be AT LEAST 200 pips, when we reach that level from our position, we can ring the register and stop for the week, or continue trading from the signals for a higher pip amount.

[Note: When you trade online through a brokerage house, they use multiple market makers and/or banks as liquidity providers for every market. They usually use between 5 to as many as 10 banks; the bid / offer you see on your MT4 screen is the highest bid from somebody and the lowest offer from probably somebody else.

When you open a position it is with some bank [say bank A]; in order to liquidate this position, you have to specifically close it with this bank [bank A], otherwise some other bank [say bank B] will be on the other side, and instead of being out of the market you will have offsetting positions [a hedge].

This is what is meant by “hedging”.]

Of course from these basic rules of the algorithm, you can adjust things to your own individual risk profile, and tailor your trading.

Next post I will be profiling specific trading examples and how I would trade them for the week. I will show how to hedge and use the yellow/plum lines as well as the aqua/red exhaustion line. To be sure, I’ll go over reversal weeks and other types of action that you can expect in the marketplace.

Have a great day everyone.

-vegas

THE HANGOVER

                            Hey Tracy? We Can’t Find Bruno Iksil

When you claim you walk on water, funny things always seem to happen.

I’m thinkin’ even the Central Planners couldn’t get in to talk to the JPM prop desk today. Not that they needed any help taking gold lower; economic stats over night in China and India were horrible. And any news out of Greece … well, it is Greece after all.

But here’s the million dollar question I have for Jamie & Blythe over at JPM: how much of what came out last night [prop trader Bruno Iksil’s $2 billion loss] did you know about in the last month, and did you relay that information to large hedge funds and the Central Planners so they could sell every rally in gold? And, just as importantly, did your metals prop desk use this info to short gold for your own account so you could capitalize on “Bruno’s disaster” when the news broke?

Inquiring minds would like to know.

“vegas ol’ buddy old pal it’s just your normal $100 / oz. drop in 9 days that happen all the time in gold. No story here; please move along everyone.”

What’s even more disturbing is the mentality these supposed “hedges” truly reveal. Last time I checked, hedging means one side goes up and the other side goes down thereby canceling out losses. Excuse me for asking, but how do you lose 2 large when hedging?

If you were an investor in my gold mine and I told you we mined 5,000 oz. of gold last quarter, and our cost of production was $400 / oz., but we lost $100 million as a company for the quarter, what would you think?

“Err yea, just a glitch in out hedging. No bigge.”

“Say what?”

Of course the real meaning of all this is that JPM will get to borrow 10 large at 0.01% from the Fed so they can sink it in some Treasuries at 1.75% and be guaranteed to make it all back thanks to the taxpayer via the spread. [Excuse me while I go puke. OK, I’m back]

Heads we win, tails you lose.

We will never know the full extent of the corruption and back room dealing behind the news of the $2 billion loss. But I know one thing for sure.

“Yea Tracy, we can’t find Bruno; we screwed up and there is no way he is gonna be available for comment on this.”

Meanwhile …….

Friday chuckle time.

 Have a good weekend everyone.

-vegas