The Confession & The Secret

Saw something very interesting.

On the M1 chart (depending on what platform you use), you can clearly see gaps in the data. The theorem that all one minute gaps get filled, is a very plausible conclusion and the vast majority of them do indeed get filled.

Therefore, when a Swap occurs after a gap has been formed, I can use that opportunity to reduce Swap Loss in the aggregate, by allowing enough time for price to return to the gap area. Typically, on an M1 chart, the time it takes to fill a gap is not that long an the movement of price away from the gap is not that much - not enough to warrant fearing a -70 to -85 pip move against the Swap Cycle, which is about the maximum total Swap Loss that I would want to sustain for a single Swap Cycle.

Right now, is a good example. At 0220 GMT-1, there is an M1 gap. At 0230, price attempted to breach the T-Trigger on the M1 chart by touching the Line at 3858. I'm going to hold the current Swap trade and allow time or the gap to fill.

0220 M1 high is 3847. 0221 low is 3849. A 2 pip negative gap. Current close price is 3858. Distance to gap closure is roughly 11 pips. This decision to hold through gap closure should result in a savings of at least 11 pips in Swap Cost.

Let's see how the theory plays out.

Precisely 16 minutes after gap creation, with an apex above the gap of 11 pips, the market has decided to fill the M1 gap.

There was no M15 or M1 Swap initialized during gap closure, but the theory still seems sound when price moves across the Trigger line, while leaving an M1 gap in its wake. Something I have not been paying attention to last week, but will keep an eye on from this point forward.

Neither Sydney, nor Tokyo, want very much to do with the EUR at this time, apparently. The current range for the session has only been about 45 pips deep thus far. If either Sydney, or Tokyo, don't provide the momentum, then I would expect the real push to come out of Europe starting at 0700 GMT.

I also need to make a correction. Throughout my thread, I've referred to my chart times as being GMT-1 which was wrong. For testing purposes, I've always used MT4 from Interbank. I no longer use them. I know use MT4 Quant from DCFX and their charts are GMT London. I apologize for any confusion in previous chart times.

H1 absolute ranges have dropped down to their historical low levels of about 15-18 pips for the last 2-3 hours. They typically won't get any lower than this. H1 average ranges have dropped down to their historical low levels of approximately 26 pips. They could reach as low as 21-23 pips, but not much lower for the EURUSD.

We should start to see H1 absolute range values pick-up between 0500 - 0700 on the charts, though London, won't be open until 0700. This is normally caused by the STL cross-over (Sydney/Tokyo/London). I was hoping for some Sydney/Tokyo fireworks, so I can get to sleep early - but that does not seem to be the case today.

If this isn't the easiest way to trade, then I don't know what else would qualify.

Just reading the latest posts now. Yes, I was thinking that you could plot a + 1 standard deviation above your line and - 1 standard deviation below. That might be the zone you are willing to defend. The market noise will be at least one deviation and if the VIX is trending higher it might be even be two deviations. You would get short at +1 and long at -1. In doing so your swaps would end up making you a little money. You would have to decide when to risk that price was moving to a new level at +1.5 or -1.5 or something like that. But the more I think about your idea the more I can't see how you can ever get away from ultimately wanting to anticipate market direction. Its just my opinion but I think you will get shredded by getting long above the line and short below the line because the institutional traders are doing the exact opposite thing -- and it's their ball game really. If you could back test your swaps that would be ideal.

I ran a quick test last week on a Market Profile point of control level to see how many swaps I would get. I had over 200 I think but that was because I was trading the line too tight. Then I remembered that the market accepts price or fair value as a zone not ever a line.

2 pips from BE at 0459 GMT on M1.

That's, I think, what's going so separate those who can do this and those who can't. There is a very strong urge to follow every single swap trade with directional bias - its a natural way of thinking - very human.

What I need as a Line Trader, are uncommon instincts. The ability to turn off that built-in tendency that I've had over 11 years, that tells me the outcome of my trade is dependent upon direction. It sounds easy on the surface to get rid of, but in reality, I can testify to the fact that it is rather difficult to do long term.

I'm getting pretty good at it on the one hand, but on the other hand, I still make stupid swap mistakes, because I don't follow the rules and I allow my directional mind to work itself up from my subconscious, to the point of interfering with my conscious level decision making. When I do that, I pay unnecessary Swap penalty and lower my performance - even when the strategy clearly worked out.

It is a psychological battle, but one that I will defeat with repetition and practice. I've been directional for 11 years. That's like being an alcoholic for more than a decade and then all of a sudden stopping on a dime. Not very easily done.

Maybe I should start a new foundation: DTA, Directional Traders Anonymous.

"Hello. My name is John, and I'm a Directional Trader."


It is the combination of tight swaps coupled to placing the line at a location in the market that has a high probability for Swing and/or Momentum, that makes all the difference. I don't mind a lot of tight swaps, if my swap skill is good and I' sharp - which I have not been lately. But, what kills the trade cycle, are lines drawn at locations that don't contain good Swing/Momentum.

This is one of the reasons why I am testing the Sydney/Tokyo/London convergence from 0000 GMT to about 0800 GMT. Daily range fuel tanks are 100% full at that time and the market must move at some point. So, if you can find ways to recovery intra-trade swap loss before the primary move takes place, you have won the battle for the line and in theory, none of your swap cycles should ever be total losses with the vast majority of them being outstanding winners (50-75 pips on average).

MFE on this cycle has been +67 pips thus far.
MAE on this cycle has been -26 pips thus far (using swap cost as MAE).

Its going to be really interesting to see what London does to the EUR today. Sydney and Tokyo, surprised me by kicking up the volatility a bit - I thought they all went to sleep for the day.

A potential bottom forming on the M1, with reduced 127% extension to the downside and a couple of 127%+ extensions to the upside. Let's see if it holds to reverse the overall direction, or whether its just another M5/M15/M30/H1 temporal rally.

Ok, guys. Technically, I'm done. MFE 67 - MAE 26 = Net Profit 41. In actually, my MAE should only be 16, as I was typing a post during the move and missed the on-time swap.

So, MFE 67 - MAE 16 = Net Profit 51 (on 1 swap), which fits inside the expected range of 50-75 pips per day. So, this one worked out nicely.

I've been working for 17 hours today and need to get some rest. I'm sure those of you in the U.K. can track the remainder well enough. I'll be back at 1200 GMT, to see how that T-Trigger works. Need to get some sleep.

Here's what it looked like:

http://www.freeimagehosting.net/t/07a8f.jpg

About 39 minutes late to work this morning.

It looks like the 0000 GMT T-Trigger was worth an absolute 243+ pips through this morning. That's what was possible. I closed the position at roughly +41 pips on paper and then set an 80 pips limit order before going to sleep. That picked up another 56 pips or so, but the real money was in the hold - which is what you normally do as a Line trader - you don't walk away from your computer screen.

So, from a test standpoint - success. However, I cannot work 24/7 - so, either I get up at 5am and trade those Triggers, or I start my trading day at 5pm to trade the 0000 GMT T-Trigger. That's pretty much what this is coming down to, given the distribution of volatility within the EURUSD.

Of course, it makes all the sense in the world, too. It is after all, a European currency at the base.

Here's what it looks like:

0000 GMT = T-Trigger Line, Enter Long 3858
0000 GMT = bar closes down -16 pips, Swap Short (3842)
1245 GMT = bar closes down +243 pips

Swap Cost = -16 pips
Cycle Total = +243
Net P/L = +227

Ok, that's what 'would' have happened. What actually happened is that my Swap was not on-time because I was typing a post on this forum. In production trading that would not happen. So, my actual swap cost was -26 pips, not -16 pips. I also closed my actual trade early last night, having been up more than 20 hours on the day. So, I never got to participate in the 243 pip run for all it was worth. That won't happen either, as I will either start my day at 5am or 5pm.


http://www.freeimagehosting.net/t/13b94.jpg

I'm waiting on another V-Trigger.

Ok, Daily range is now 152% of normal. Range limits are now 172 - 193 pips, with 263 pips run out thus far. So, unless the EURUSD makes a huge retracement to the upside, I really should stay away from any V-Trigger that involves an entry with 0% fuel remaining in the Daily range tank.

People want to know, why worry about Range. The difference is clear, the 0000 GMT T-Trigger cycle ran for 152% of the Daily range, while any V-Trigger cycle would have 0% expected range remaining. That's why range is so important to trading a Line.

It might not be important to a Swing trader, who holds through multiple Daily sessions, but when you need to make your pips in the same 24 hr cycle, then knowing the range condition is a bit like knowing how much fuel you have in your car before setting off on a long cross country trip.

Having said that, I'm still going to test the voracity of the V-Trigger when/if it arrives this morning. I'll be looking for evidence of market consolidation after range exhaustion. Or, hopefully, the market might provide a nice Long side retracement - however, the fundamental news makes that less likely. We'll see how it works out for the V-Trigger today.

Technical Analysis: While I wait in the next V-Trigger, I'll quickly explain why the EURUSD is behaving the way it is. Bloomberg, reports that the EUR is giving back a large portions of its recent gains, because of the lack of clarity out of Europe regarding the debt crisis. I always find it very interesting when the Fundamentals line-up with the Technicals.

I see things technically, and because of that, what I see is the fact that the EURUSD just launched:

1) The start of a new monthly range
2) The start of a new weekly range
3) The start of a new daily range

Outside of the Quarterly, Semi-Annual and Annual ranges, these are the Big Three. These are the real (technical) market movers - in any market and in any instrument traded.

The Monthly range on the EURUSD = 743 to 754 pips
The Weekly range on the EURUSD = 414 to 418 pips
The Daily range on the EURUSD = 173 to 192

0000 GMT, represented the start of a new Month/Week/Day at the same time. That's typically a pretty volatile period. The pair wants to expand into its normal range limit and the start of the range is where you typically find explosive price action.

So, there should be no surprise why the market in the EURUSD is moving so rapidly now and with such momentum. Yet, another example of why range is so important to the Line trader. It helps to understand the overall condition of Momentum. Something the Line trader cannot live without.

You basically have three big ranges that need to move, all starting at the same time. That's what end of month and beginning of month typically gives you. A 754 pip range is significant and that range has 30/31 days to expand. The 418 pips range has only 5 days to expand and the 192 pip range has a mere 24 hrs to expand.

Combine the expansion times while compressing the starting times together into a single event, and you get rapid price movement.

That's technically why the EUR behaves the way it does right now. Of course, Bloomberg, will state it in Fundamental terms - that's their job.

V-Trigger at start of 1345 M15 bar at 3647:

http://www.freeimagehosting.net/t/0bdbb.jpg

Swap sequence initiated. Using M1 for cycles. Swap on Close.

Searching for a reason to use Perimeter Swaps.

LOL, Dave Rovelli, was just on Bloomberg, saying that "its impossible to trade this market..." He went on to say that "...even the professional traders who have been doing this for years, can't make money in this market.."

LOL, 243 pips later....

Funny.