WHEN DOMINOES FALL

                             Tumble, Tumble, All The Way Down

I’m going to make today’s post short and sweet so as to drive home the most important element of trading. I seriously think almost all of you do not take into account the law of unintended consequences.

The most important element of trading, and ultimately your success as a trader, is entry into a position. Forget for a moment how you came to the conclusion to either buy or sell and initiate a position, and how you liquidate that position.

Proper entry is the most critical component of a trade. When you enter a trade poorly, you start the process of a string of dominoes tumbling down the line to an end you can only guess. In other words, dominoes start to fall; do you know what the consequences are going to be?

I have written many times of “The Power of $1.50”, and you can poo-poo my premise, but the math is on my side. The fact is, compounding gains with leverage leads to a very large trading account and the freedom that goes with it.

Money = information and vice versa, and if your entry is poor, it means that the information you have will lead to a poor price for entry, thus meaning that your stop loss must be wider than normal due to the poor price. If you keep the same parameters regarding the stop, you run the risk of a higher probability of getting chopped with “random noise”. 

And herein lies the rub: just from one little mistake, you have compounded the problem in ways you probably haven’t thought of before you decided to make the trade. Do it many times, and your account isn’t going to grow as you would wish.

It all starts with an inflection point where information is greater than money. Not all time/price moments are created equal! You need an algorithm that can pinpoint these moments and get you in the position at the right time and the right price.

Now, that doesn’t mean you have a guaranteed winner; it simply means you can then use tight stops. Losses by definition then will be small and manageable. As the trade becomes profitable, the market can then tell you when to liquidate and exit the position; letting profits run.

Avoid the falling dominoes.

Today’s Action & Wrap Up

Again today, the Asian session shines and the rest of the day is a bucket of slop. We came into the day in buy mode, and our first trade was at 3:25 AM [Chicago time] at 1662.00. Stop was placed at 1658.50, right at the most recent low of 1658.48. At 4:10 AM [Chicago time] we get a confirmation top at 1664.50 [discussed in the manual and Appendix IV]. Gain of this trade of $ 2.50 / oz.

Our second trade came at 5:05 AM [Chicago time] at 1664.00. Stop was placed at 1660.00, right at the support level from 3:00 AM [Chicago time]. About an hour an a half later, we got a confirmation top at 1665.00 [discussed in the manual and Appendix IV]. Gain on this trade is $ 1.50 / oz.

Looking at market action, it is choppy and since Asia closed the market has not been able to gain further traction. I’m up $4.00 / oz., and extremely leery of getting back into the market as long positions struggle to go anywhere.

At 8:00 AM [Chicago time], as the market is breaking down, I make the decision not to trade further for the day. I’ll keep what I have as we limp into the US session.

Gain for the day is $ 4.00 / oz., but the action almost makes me feel like I lost money. I took heat on both trades, and it sure didn’t feel like it was in Asia on the way up. Like yesterday, not enough for a Ka-Ching, but enough to keep the dog in dog food for another day. :J)

Have a great day everyone!

-vegas

Update: it would be nice if I could add correctly. Some days I wonder how it is I don't work at the circus. Anyway, my gain on the day is $ 3.50 / oz., not $ 4.00 / oz I stated above. I made a 50 cent error when subtracting the prices on the second trade. Yes, you can trust me with math.

THE EVENT HORIZON OF TRADING

                                      Every Kid Knows This

You trade because you think you have information that is ahead of the market. For the purpose of this discussion, it doesn’t matter how you came about clicking that buy/sell button. Every person on earth is in the exact same position 1 millisecond after a buy/sell order has been initiated. You have to know when you are in trouble [wrong] and get out [liquidate].

For too many traders, this is a completely unknown variable, whose total value is based on whim and fancy. Some of you will just throw a stop in based on how much pain you can take on any given single trade. We place a stop where there is a perceived technical violation; making us to think either the algo just went in the other direction or something of value has been violated therefore making the trade wrong in direction, or both.

                                     Information > - Money

                                    Or, + Money > Information

What is needed is an exchange of information where the knowledge of information gained on the loss is greater than the monetary value of the loss. In other words, we are at an inflection point of information. We are at the point of no return so to speak. Something has to happen and no matter what it is [up or down, profit or loss] we are going to gain one way or the other [information or money].

                             The Event Horizon Of A Black Hole

Nothing in nature is more powerful than the gravitational field of a black hole. Here, at the event horizon, physics breaks down. You are at the point where you can’t get any closer or you will be sucked in; even light particles can’t escape the gravity. Here is nature’s moment of truth; where everything on one side of the event horizon exists [including information], and on the other doesn’t exist. This singularity is where everything happens: where God divides by zero.

Almost every trading signal “The Vegas BFSG Algorithm” initiates starts with the premise that we are at an important inflection point regarding the prevailing intermediate trend. As I said in the post “Vector Space Trading”, we sit on the surface of the trading pool, waiting for that piece of information that tips the scales in our favor of profit.

But……

The most important thing coded into the algorithm is its ability TO KEEP YOU OUT OF TROUBLE. [When we hear our middle name spoken, we know we are really, really close to getting it.] That doesn’t mean we never have any losses. Losses on some trades are inevitable. Anyone who says different is a liar and a fool. What it does do is skew the profit probability distribution curve in our favor based on normal and/or higher volatility.

So, no matter the method you trade, you need a concrete understanding of what makes your trading successful, but more importantly what makes it lose money. If you don’t know, you can’t even ask the right questions, let alone doing something about it. You have just pasted the event horizon of trading

Today’s Action & Wrap Up

As those of you who have the algorithm know, we went into “sell mode” at 8:00 PM [Chicago time] last night in the Asian session. Early in Asia the market rallied and we got our first sell signal at 3:40 AM [Chicago time] at 1718.50. Stop on this trade was placed at 1723.10 which was right at the previous high at 2:25 AM [Chicago time].

The algo turned to buy shortly thereafter, but the price differentials were so small, the stop was never hit. If you got out and took a small loss of a couple of bucks because of this, that’s fine as long as you do this consistently over time.

As a matter of definition, when I place a stop loss on a trade, it never gets pulled or canceled unless I’m trailing a profit. In this way I’m consistent in my approach. So, even though the algo went into buy mode for a few candlesticks, it wasn’t enough of a price move to make any difference, and didn’t hit off my stop.

The reason I take this approach, stems from my days in the gold pit. When the algo hovers around a signal, going slightly over or slightly under buy or sell, the probability it can chop your account up is high. The last thing you want to do is go sell, then buy, then sell, then buy, etc., etc., within a few bars or candlesticks, getting chopped up and losing money and absolutely nothing is going on in the market. Make the market prove to you it can stop you out and go the other way.

So, my gain on the day was about $ 11.50 / oz. But for reporting purposes [and Skeptic Cat of course], and because I know that some of you probably got out and then back in a little later when the signal to sell came again at 1718 [6:00 AM Chicago time], I’m going to assume a $ 3.50 / oz. loss on the first trade [which is generous]. We got a confirmation bottom, which I clearly point out in the manual and Appendix III at 1707.50 at the 7:50 AM [Chicago time] candlestick.

So, the net gain on the day is $ 7.00 / oz. [10.50 – 3.50].

 Time to go live life; no matter what happens this afternoon, it will be here again tomorrow.

Repeat after me:

Ka-Chingggggggggg  [Day over, thank you Mr. Market]

Have a good day everyone.

-vegas