DANCING ON THE HEAD OF A PIN

                                          Sounds Like A Plan

Round up the usual suspects: low daily range [$17 but was really $14]; numerous spikes/drops in a microsecond [7 in 2 hours]; go to the high, make a new low, rally a buck or two and then zzzzzzzzzzzzz into the close with a minor bump up. Yippie-Yip.

We got long on the disappointing ADP employment report; a few minutes later on the spike above 1659 I liquidated and took the incremental gain.

I want to use today’s post to talk about my trading game plan and what I’m trying to do. I’m all about treating trading as a “probability” event.

As you know, on April 8, 2012 I revised [in a major way] my trading algorithm. This was the first major revision since 2001. Through the last decade I have made some minor changes, but this had some major changes affecting the way I trade.

Since the start of trading during that week of April 8, and including today, we have had 18 trading days; 15 of the 18 days have had lower than normal daily trading ranges, most well below normal [$20]. All 3 days that had normal daily ranges [$20 - $30] came right at the start of the April 8 week as I was implementing the algorithm.

Make no mistake, daily range is important. Over time you can’t ignore the implications it has on your results. Do not attach major importance to algorithm signals [in gold] where the daily range is between $7 - $15. In all likelihood the move isn’t over yet, so why would you want to fade it?

Most of the time [not always of course], if I get a signal [buy or sell] when the daily range is under $20, I will ignore it. Why? Because the probability of a further move in that direction is high to put in the “range” for the day. Reversal days [after a $10 range] happen less than 10% of all trading days; double reversal days less than 1%.

Outside of the first few days, we haven’t had any normal trading range days since the algorithm revision; today is the 13^th day in a row of sub-normal daily range trading activity. I don’t want to commit to higher trade size [and therefore more leverage] when and until the range is reflective to the point of allocating capital to the trade.

When I get trading signals where the range is over $20 [concurrent with the signal], I will almost always take the trade; in some cases I will even be early to the trade [anticipating a plum line slope change]. Under these circumstances I will also increase my trade volume [leverage] and look to hold the trade longer: even to the point of taking it into the next trading day if necessary.

This allows us, with lessened risk most of the time and no risk some of the time, the chance for big percentage gains.

However, when the market doesn’t put in any kind of normal range, and therefore no buy/sell signals I usually take, I will scalp lower volumes for incremental gains. Not every day is a lottery winner. This makes perfect sense when the probability for success isn’t as high as I want it.

Now, I can’t make the market move. I don’t have that magic wand that allows me to say, “Mr. Market you have to have a $20 - $30 range today.” If I did, I’d have all the money in the world within 2 years. So, while I wait for “normal” to reappear [and it surely will], I add value without adding extra risk. Remember, trading is a probability distribution, not an exact science. Every financial market has hyper, normal, and slow periods of trading. Hyper and normal I love and make up the vast majority of trading days.

I am very happy with the revised algorithm and the changes that were made; it is performing well. Even with all the spikes/drops, all we need now is more normal daily ranges [over 1.25% of nominal value], which make up over 85% of all trading days.

So, going forward, you now have a better idea of what performance should and will look like.

Have a good day everyone.

-vegas

UPDATE

Two days ago we had an official $22 range in gold; the financial medias "fat-finger" trade, where we went down $15 in one second then 20 seconds later we are $5 higher off that low. So, in all honesty I can't say there was no normal range; make it 12 out of the last 13 days gold has had sub-normal trading ranges. It only felt like sub-normal.