THE FX CROSS

                                         My Game, My Rules

I have previously commented on the FX pairs GBPJPY, EURJPY, and EURAUD. Of the three, EURAUD is probably the better trade, but it really depends on your individual preferences.

When I sent the staff out to round up any/all Forex pairs for analysis, I made a cursory look at the MT4 platform to eyeball spreads. After all, who wants to trade anything in the FX arena that has a high spread [greater than 4 pips]; there is simply too much opportunity throughout the 60+ pairs to give money unnecessarily to the dealer community. Just 1 pip, after a year, can mean a couple of thousand bucks in your pocket you wouldn’t otherwise have to keep.

The one pair I missed, and am recommending now, is GBPAUD. The spread is about 3 pips [give or take a couple of 5^th digits] which make this a great instrument to trade. When you consider both AUDUSD and GBPUSD trade at about a 2 to 2 ½ pip spread against the US Dollar, the cross @ approximately 3 gives us 1 ½ pips on each side. Since both pairs move, this is an extremely good spread rate on a non-dollar cross. Observing the trade throughout the European and US trading sessions, I saw the spread between 1 ½ on the low side to 3.7 on the high side at different times; and most of the time the spread hovered between 2.8 and 3.2.

I want to approach the analysis of this pair from a slightly different angle than I did the 3 pairs listed above. I looked at the data since Forex-Metal came into the business around the start of 2006, which is approximately 400 weeks. The Excel spreadsheet below lists the 28 weeks of “tail risk” that I have identified from the data. This represents approximately 7% of all trading weeks. That means that approximately 93% of all trading weeks have moves of 200 pips or greater from the open to the high value. You shouldn’t have any problems making good money 93% of all trading weeks.

                                  [Click On Table To Enlarge]

Both the average and median levels for low value and high value, respectively, are very close to each other, indicating no great skewing of the data from a single data point. Simply put, our tail risk [when we come face-to-face with it] is a low value of about 66 pips and a high value of about 139 pips. The $64,000 question is can you make money in this tail risk?  With a 3 pip spread and an active trade in all 3 major world sessions, I think the answer is a definite yes; of course, not as much as in a “regular” week.

When I designed the original “-vegas Big Bang Algorithm”, and a short time later the “long term VBB Algorithm”, the FX markets [particularly the non-dollar crosses] were what I had in mind; above average volatility with tight spreads and excellent volume in the dealer community. There is no doubt in my mind that you can easily trade up to $10 million in any of these pairs without so much as creating a ripple in a teacup.

You need to be aware, though, of the rollover each day and the “vig” that is either paid out to you or the money you pay to hold the position. Right now, you are going to pay about 2.2 pips to be long through the rollover, and you are going to receive about 0.9 pips to be short through the rollover. This is due to the respective short term interest rate differentials between Cable [GBP] and the Aussie [AUD].

[Note for newbies to FX: “vig” is calculated three times each week; Monday, Tuesday, and Wednesday. Wednesday vig is calculated through the weekend to Monday, so if you forget to get out of a long position at the Wednesday rollover, you will pay 3 times the rate [6.6 pips] even if you get out 2 seconds into the new day.]

This has the potential of becoming an expensive proposition if done every day; I therefore recommend liquidating positions in this pair instead of hedging up on signals from the yellow/plum lines.

In my next post, I am going to go over some examples of the trade in GBPAUD and point out how I think best to trade this instrument. I will give specific rules to follow and show examples of their implementation. I will begin trading this on Monday, the start of the new week.

Have a great day everyone.

-vegas

YOU CAN’T LIVE WITHOUT FAITH

                            Faith & Happiness “In The Moment”

When someone starts trading they inevitably make one very important mistake; they concentrate all their energies on price.

A long time ago, in a galaxy far, far, ……… [wait a minute, that was something else.] When I first hit the trading floor many blue moons ago, with my shiny new badge and convinced I knew what I was doing [I didn’t], I would ask other veteran traders before the open where they thought “price” would go.

These were guys who had traded eggs and butter years before I showed up and were reading and thinking about markets when I was in 1rst grade hoping for recess. They would look at me and I could feel the contempt for me even being there.

“Hey rube, you want some free candy”?

It was my mentor Bert [a few years earlier], who had taught me the importance of volatility and the need to spend almost all of your time studying it and the effects it has on the market [s] you are trading.

Of course, since I was now a “member” of an important commodity exchange, and the fact I was still in my 20’s and knew everything, I thought all that stuff Bert taught me was BS. Wave your hands ….. Watch the price …. Buy and sell ….. Presto bango …. Money.

I initially struggled on the floor, until I put my pride aside and completely and fully embraced the principles of volatility that Bert had entrusted to me.

All of the previous versions of my algorithms released on the internet to the trading public [1 hour tunnel method to the present] have sought to take advantage of volatility to some extent. Previous versions had limitations that the market exploited and led to extended periods of time that either made little money or led to small losses. This is unacceptable to me.

The “Long Term –vegas Big Bang Algorithm” [especially in WTI Crude Oil] is the most powerful trading algorithm you will ever have in your possession as a retail trader. I challenge you to find anything even remotely close to the probabilities of success the algo provides. The fact that it’s FREE VERSUS the crap you can buy for $$thousands$$ should have you studying “The Data Has No Agenda” series in earnest after you read, reread, and study the “-vegas For Life” file.

The logic behind the long term algo is inescapable; either a market has average, little, or zero volatility for the week [0] OR a market has higher than average volatility for the week [1]. With these two outcomes and no other probabilistic events possible [i.e, a 0 or a 1 is the only outcome possible], we seek out any market that falls into the “1” category.

If you believe any market, or group of markets, is going back pre-1972 [a 0 event] then fade every algorithm signal for profit. Good luck with this scenario because not only is it unlikely, but I don’t think it is even possible given global trade.

So, what prevents the long term algo from being the “Holy Grail” of trading?

Easy; how you put your hedges “on and off” and the behavior of the plum/yellow line cross “overs” and “unders” when you are unhedged. If the volatility is there during the week it is impossible for the market to rise in price UNLESS the plum line is over the yellow line and it is impossible for the market to go lower in price UNLESS the plum line is under the yellow line.

This is the reason why I recommend taking hedges [when the plum/yellow lines cross] at or near the week’s high or low, and keeping them on UNTIL price again threatens to EXPAND THE HIGH OR LOW FOR THE WEEK [where incidentally your hedge price is]. When we take them off, the market is moving towards the high probability scenario we know will happen.

I am intentionally skipping all the other action [with the plum/yellow line cross] because a) I don’t want to get caught in either daily or weekly reversals, which by the way have a high probability and b) I want to place my FAITH [read my money] on expanding volatility probabilities THAT I KNOW EXIST FOR ANY WEEK!

Implement this logic with multiple lot winners and 1 lot losers [initially at or near the week’s high or low] and you almost have to want to lose to not make money. Your “tail risk” is a week with absolutely no movement and/or a week that goes back and forth between the week’s high and low making new high’s/low’s by a few pips before reversing.

This “tail risk” is real, and will eventually take place some weeks into the future, and is the reason I strongly recommend using part of your profits to establish a “rainy week fund”. If your goal is to make $2,000 per week [for example], over time save up 2-3 times your weekly goal and put it away for those “tail risk” weeks so that you can easily pay your bills and live life like nothing happened. Then it’s back to business as usual.

Trust me, when you start making money, everybody in your life will be looking at you like you are an ATM card. Nobody wants to hear there was no volatility this week – they want to see the moola.

Success for you will ultimately depend on your faith. Live and trade in the moment; forget last week [it’s over and doesn’t matter anymore]; forget next week [it’s not here yet and has no bearing on right now]; concentrate on what you need to do now or today. If you need to hedge, then hedge; if you need to add to your position, then add to your position. Concentrate your energies on what needs to be done based on the algorithm.

As for me, I’m putting my money [faith] where my mouth is, and I’m betting the world of trading isn’t going back to the 1950’s.

Have a great day everyone.

-vegas

DEALING WITH TAIL RISK

                                Be Careful: It’s Waiting For You

Before you even make your first demo trade, you must give some serious thought to those events that have a low, to very low, probability of happening in the marketplace. Does your algorithm consider such events? If no, why not? If so, how?

                       Risk? What Risk? Account Balance = $ 0.00

Can you survive a day in which gold has a range of $150? How about a double or triple reversal day where prices cascade lower not once but maybe two or three times?

                        When SHTF, Where are You On This Chart?

It can come twice in a week, and then not be seen for 15 years. It may never happen in your trading career, or it may happen on your very first trading day. It can’t be predicted, but it can be dealt with effectively.

Your highest priority, as a professional trader, is to make sure you will be here tomorrow. No one trade “makes or breaks" you. No one day is going to have your "retirement” trade in it.

                                    When You Meet Tail Risk?

In my 30 + years of trading I have personally seen too many traders become ex-traders because of poor planning of [probability distribution] tail risk.

It is specifically because of tail risk that “The Vegas BFSG Algorithm” does the following:

1)      trades from the side of the highest probability of success, on any given day, where it is determined momentum is greatest based on a very long trading history,

2)      makes every initial opening trade based on intermediate money flows with the highest probability of success [money > information],

3)      places our trade at a crucial juncture in terms of time and price,

4)      forces us to sit on our hands and not risk capital when it is determined the probability of success is not in our favor [ less than 50%], and

5)      Always trades with stops in place. ALWAYS!!

Having said this, it doesn’t mean we never lose money. It means we manage risk and most importantly TAIL RISK.

In an environment of rapidly falling prices yesterday, where gold was down over $50 / oz., we still managed to make money from the long side. The fact that we missed the down move doesn’t concern me: it was an opportunity cost, not a real loss. All we lost was an opportunity, and those are infinite in scope.

Today’s Action & Wrap Up

The algorithm has very specific criteria that initiate “buy mode” and “sell mode”, along probabilistic distributions. We came into the day in “buy mode”. The Asian session had some very mild short covering to start the day, but very quickly prices started to drift lower in choppy trade.

Our first buy signal came at 12:10 AM [Chicago time] at 1568.50. I placed a very tight stop at 1565.50 and it got taken out a few candlesticks later. Loss on that first trade was

$ 3.00 / oz.

Our second buy signal came at 1:00 AM [Chicago time] at 1567. I placed the stop at 1563.90. At 2:20 AM [Chicago time] we got a confirmation top [discussed in the manual and Appendix III] at 1582. Gain on this trade of $15 / oz.

So, for the day we had net profits of $ 12.00 / oz.

Altogether now, Ka-Chingggggggggggggg  [Again]

And because I felt like yesterday was a loser, even though the algorithm scratched out a meager buck, let’s do it again because it feels good to do it twice:

Ka-Chinggggggggggggggggg !! [Oh yea, it does feel good the second time too.]

I got a lot of emails late yesterday, questioning the “buy mode” status of the algorithm. I sum them up as follows:

“I don’t know vegas, stuff looks terrible on the charts. We’re in “buy mode”? Ohh boy.”

Or,

“Man, we’re missing big moves on the downside by not being short; are you sure we should be buying?”

                                     I'm Shocked!! Who Knew?

My response to all was just follow the algorithm. Stop thinking and just follow it. This is where your profits are, not in thinking on the proverbial fly so to speak. What I think, what you think, doesn’t mean squat. Reality doesn’t care!

The power of the algorithm rests in its ability to garner profits from the day, not in any single trade. By itself, any given one trade is not the “load-the-boat-here-we-go trade” for the day. I don’t believe the algorithm has the ability to make that specific of a call. It is the total trades for the day that make the probabilistic argument for profits.

Whether we have to trade once, twice, three times or more, in and of itself simply does not matter. By using proper leverage and stop placement, we are never faced with the prospect of large losses from trading. It simply is not part of the game plan, and this one fact keeps people from destroying themselves while thinking about the market.

Given the results of the day, I rest my case.

Have a good day everyone.

-vegas