Caution: Math Geek at Work

I got stopped out of NZD/USD too. Grrr. However, this pair is still my current focus for building a long position, so I've placed some pending buy orders above a recent volume density area. Price would have to break above this area to fill them though, so until then I have no position. If it continues down, I'll continue looking for lower spots to buy in. Here's the chart:

I entered long at 0.5350 with another small position and have additional orders waiting above that level. The current position is down about 70 pips right now.

Since my analysis is now centered on Market Profile concepts and is more geared toward high volume S/R areas, I think I should concentrate more on placing limit orders near those levels instead of stop orders on the breakout side.

So... when I'm placing orders for the short term "set and forget" mode, I'll use limit orders instead of stops. I still want to add to winning positions, but I'll do that in the longer term on a week to week basis. This is an inversion of my former habit of using set and forget orders in the short term to add to positions.

I started thinking about this last night when I did a "daytrade" on EUR/USD. More on that in the next post.

I used Market Profile concepts and my volume density analysis to do a daytrade on EUR/USD last night. This trade netted me about 4% on my account equity! Once I had entered the position in two parts, I set my stop and TP and went to bed. Got up to find my target was hit. Here's the chart:

Hi Scott,

If it doesn't take too much of your time, could you please take a "math look" at this? Please disregard or ask me to delete it, if you want. Thanks.

Nice overall average direction so far, but those down spikes are kind of scary. They recover quickly though, but there's got to be some kind of risk involved in that. Is it a martingale of some kind?

I've been doing some daytrades in the EUR/USD because of the low spread. I'm using my version of Market Profile and "volume density" analysis to pick my spots...

...errrm, except in this case where I actually just blindly searced for a bottom. My first trade was a loser, but I lucked out on the second one and made a net profit for the session. Even though I was profitable, I don't consider this a good trade because I wasn't really using my tools correctly for the entry. The entry was basically throwing darts at the chart. I should only be entering at points where there is a nice solid established area of high volume density between my entries and my stop.

Contrarywise, I DO consider my exit to be a good trade even though I gave up a bunch of pips by exiting too early. That's because I took into account my tools; there was an area of potential resistance that could have been a problem, so I put my TP below that to raise the probability of reaching the target.

Here's the chart:

The account was up 2.1% this week.

That's actually really good considering that I started out the week getting stopped out of both my GBP/USD and NZD/USD positions. At that point I was down well over 5%. What turned it around in the latter half of the week was an increase in my new, larger NZD/USD position with a better entry point, and the two out of three winning daytrades I had in EUR/USD.

This Market Profile and Volume Density Analysis stuff is really looking good so far!

Yes, it uses down averaging. You may observe that down spikes coincide with up spikes. That is because the algorithm trades both directions, building a cushion for harsh times like these. It profits steadily in all market situations, except one: tidal waves. But it is interesting that it failed only 3 times in a 10 years backtest. It survives most strong moves and still gathers profits from them. I think the catastrophic loss danger may be eliminated by better adaptive behaviour and some additional "margin management" routines. The expected resulting risk may turn into a few moderate losses from time to time.

Remember that Taleb's basic concept in books like "Fooled by Randomness" and "The Black Swan" is that extremely unlikely events like tidal waves are in fact inevitable. It's very unlikely that there will be one tomorrow, but very likely that there will be one SOMETIME.

His prognosis was to speculate ON the tidal waves instead of against them (if I understood his point correctly). The rationale was that most traders will discount the probability of such events too much, not realizing that the tails of the distribution are fatter than they think. This causes market mispricing, and gives a statistical edge to the trader who is positioned for such a black swan event. Such a trader will profit from all the traders positioned on the other side.

Yes, it is something like that I am beginning to write into the code: restraints on counter trend positions and reinforcements on trend positions, managing the unbalance, until the tidal wave shows signs of exhaustion. Thank you for your input.

I did an intraday "set and forget" trade with the EUR/USD again last night, and woke up to find that my stop had been hit to the pip, right before the price plunged down to my target. The lesson here I think is to babysit these trades while using only a mental stop. So when price hits my "stop" on a single print and immediately rebounds, I know not to give up on the trade. Also, I really intended to close these EUR/USD trades by the end of my session, so I should start doing that. Here's the chart:

Ugh! The RBNZ dropped rates by 50 bps more than expected and I got all kinds of stopped out everywhere... The chart shows the carnage. Still looking for the bottom on this one.

The account was down 4.4% last week. Reducing position sizes a bit.

The account was up 5.4% last week.

Everything seemed to go my way. I entered short on the USD/TRY again as a carry trade, and that position is in profit. I did a swing trade (that started as an intraday trade) on the EUR/USD and exited at a profit by the end of the week. Finally, my long NZD/USD and AUD/JPY positions are in the green as well.

I've been thinking about how to describe my approach to trading in terms of "trend following" or "contrarian" but it's actually a combination of both depending on time frame.

In the longest term, I'm a contrarian, looking for overvalued or undervalued pairs. This has a fundamental underpinning in economic reality; as a country's currency rises in value, its exports are less competitive, leading to CB intervention and/or loss of demand for its products which lowers the demand for the currency, turning it around eventually. So I believe that in the long term, the trend is NOT your friend because it eventually must turn around due to economic realities. So in the long term, I try to find tops and bottoms. (Please, no trite market "wisdom" like how bottom pickers will become cotton pickers blah blah blah...; the market doesn't read bumper stickers. )

So the first phase of my long term trades involves taking very small counter trend positions with no stops as I wait for signs of the bottom or top to appear. I mean VERY small positions. In no case do I allow my actual exposure to exceed the value of my equity, and in most cases I'm down in the 10% to 50% range. This is the "averaging in" phase. I know that averaging down is a bad move IF DONE RECKLESSLY, but done with a risk limiting position size limit, I believe it's the right move during this phase. The key tool for identifying the pairs to trade is the TA/FA divergence analysis that I publish each day on www.market-geeks.com. (Whatttt??? Another shameless plug???)

Eventually, we see a bottom or top, and my key tools for identifying these are the concepts of Market Profile and volume density. Also at this stage my small position, built during the averaging-in phase, manages to move into the profit zone. This is yet another indication that we've reached a price extreme. HOWEVER, price can always turn around again and continue against me, so in a case like that I would continue to build the position up to the max limit imposed by my equity. At the max position size, I would simply hold on without adding any more, knowing that I'm safe from a margin call due to the fact that my deposit covers the entire position (less than 1:1 leverage).

It's only when the pair starts to move my way that I go beyond 1:1 leverage, add an actual stop loss to the trade, and add to the position as it moves in my favor. This is the "trend following" phase. The problem during this phase is how to add to the position, trail the stop and keep pyramiding my profit without getting stopped out too quickly and losing out on the large potential gains of a sustained trend. I'll be doing some research on that question next.

Here's a chart of my recent trades in NZD/USD illustrating the phases:



Finally, here's a chart of my EUR/USD trades this week, which contributed about half of my profit.

The account was down 2.6% this week. Contributing to this was the move up in the USD which caused my open positions in NZD/USD and GBP/USD to decline. Also, my short USD/TRY carry position lost some of its profits from last week and was stopped out at a smaller profit.

Here at the Factory and on www.market-geeks.com, I often say I'm "building a position" in some pair, so I thought I'd add a little detail on that. I'm currently building long positions in NZD/USD and GBP/USD, so I've shown those charts below.

Once my TA/FA divergence tool identifies a pair to focus on, the first thing I do is place small orders both above and below the current price at the round number handles. In the NZD/USD I've been using intervals of one cent (100 pips) and I've been using 2 cents (200 pips) on Cable. The key here is to use larger orders at more advantageous prices, so for long positions I place larger orders at lower prices and a series of equal sized (but smaller than the lower priced orders) at higher levels.

After a few of these orders get hit, I end up with a small initial postion. Then I begin a process of trading around this position. When price moves against me, I add slightly to the position using a formula based on my equity and my exposure to the pair (I NEVER let my exposure exceed my equity in this phase). When prices move into the profit zone, I take small profits, but these liquidating trades are generally smaller than my entry trades. This allows the position to continue growing until price starts to move in my overall expected direction.

Currently on the Kiwi and Cable, I'm in the initial phase of just creating a starting position. Here are the charts:

Take a look at the last two NZD/USD charts I posted; one in post #394 and the next in post #396. What happened to the position I was building in the earlier post? Well, what happened was that it went into profit, I started trailing a stop behind it, and it got stopped out.

So I've had to start building my long position again at higher prices.

Soo...... what? If I had stayed in the buys that I had during the first buildup, I'd have a much lower average entry price right now. I'm moving the stop up too fast and it's causing me to get out too early. Got to fix that. I should keep the stop down below the area that I've identified as major support and let it sit down there UNTIL ADDITIONAL BUYS CAUSE MY EXPOSURE TO EXCEED MY EQUITY. At that point I can begin moving it up.

Remember, these additional "trend following phase" buys will only happen if price moves up to higher and higher levels, so at the point where the risk becomes too great, I would be at a substantial profit already.

Right. ok. Let's see how that goes with the two positions next week.

The account was up 1.0% this week. Contributing to this were several successful intraday trades on the EUR/USD and some positive movement in my three longer term positions.

I continue to be long the AUD, NZD and GBP against the U.S. Dollar. Here are the charts of my weekly activity in those three pairs.

The account was down 0.2% this week. I didn't have much activity. I'm still basically long the world against the dollar.

Whoops!!! I forgot last week's wrapup, since I didn't have much activity again. The account was down 0.5% last week.

This week is looking better so far as I've taken slight profits on AUD/USD and USD/JPY. My current focus is long GBP/USD and I had a good trade there this week. I'll post charts on this week's trading activity during the weekend.