MAKING TROUBLE PAY

                       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.

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

PROBABILITY ANXIETY

                               What Could Possibly Go Wrong?

Whenever I find myself in a bookstore, I always wander over to the business section to see if there is anybody checking out trading books. Wait 5 minutes, and potential rich trader wannabes show up and browse through books on technical analysis. [The answer is no, I don’t have a life.]

“Hmmmmmm, this looks good. Yes, that’s my ticket! I think it’s potentially time to go pick out the color of my new Porsche 911.”

The fact that every major player in the market knows about your head-and-shoulders bear pattern on a 1 hour chart shouldn’t bother you, should it? I mean, you got something there that only 5 million people know about, and is offered in charting 101. So, what could possibly go wrong?

I can see you sitting there, at your computer, pondering this awesome retirement play off the umpteenth head-and-shoulders pattern.

“Ohhh man, do I take this trade? The ones I sit out work, and the ones I get in lose money. Oh [insert market] God, why can’t they all work? Oh man, what do I do? Is McDonald’s hiring?”

Without knowing it, you have probability anxiety. The bad news? Well, it’s serious, and unless you get the cure, your account is terminal.

Do you understand the ramifications of faulty trading logic and what it can do to your account?

                                      Science Just Proved It

Of the 6% of all trading days that “The Vegas BFSG Algorithm” loses money there are two things I can definitively state: 1) The losses will be small, and 2) I know EXACTLY why it lost money. There isn’t any guesswork.

The only thing I don’t know is the probability distribution of those losing days. I once had 4 losing days in a row, and then it went over 9 months with every day making money.

I know how to make money; I don’t have ESP!

I know “The Vegas BFSG Algorithm” has been built and coded with trading logic that works. I know the limitations of the algorithm, and also know that my probability trade-offs don’t give me a case of “probability anxiety”.

                         Because It’s The Way The Universe Works

So, next time you trade that horse & belly formation looking for your new red Porsche 911, ask yourself if you have any idea why it should work?

Hope & Change is NOT a trading algorithm.

Today’s Action

                              Many, Many Happy Algo Traders

I love action like today: gold set up perfectly, giving us a buy signal at 1745 at 3:25 AM [Chicago time]. Within the hour, we had a confirmation top [explained in the manual] at 1752.

Bingo – bango, $ 7 / oz. gain on the day. [Thank you Mr. Market, see you tomorrow!!]

Ka-Chinggggggggg!! [again]

Seriously, you gonna make me ask this again? What are you waiting for Skeptic Cat?

Have a good day everyone.

-vegas