AUDJPY: Profit Is My Density

No, that's not a typo. It's a rip-off of a line from the Back To The Future movie. Anyway, this post is another in the series of theoretical considerations with respect to various robot building strategies.

In this scenario let's consider fixing our maximum total position size across a specific price range. For example, perhaps we are willing to purchase 10000 units per 1000 pips (remember, I'm generally talking about small account sizes). For Oanda traders this will run you up to about $175.00 in margin.

If you want to limit your overall positions to 10% of your account capital then you'll have to ante up $1750.00 to play in that 1000 pip range. Obviously, a large account value will either give you a larger playing field or a higher density of positions if you don't expand the playing field.

Are you still with me?

I know, at this point things are pretty boring. In fact, we're looking at a simple grid that we can play every time price passes through our space. However, this gets a bit spicier if we can find a way to optimize the open and close activities.

For example, what if we can compress our position openings towards the low end of a short term movement? Similarly, what if we can compress our position closings towards the higher end of price movements within our price space?

If you have good ideas for these processes, then you are set!

My thought is to adjust the probability of closing profitable positions based on the amount of profit a position embodies. For example, perhaps a position with a 10 pip profit has a 1% chance of being closed while a 20 pip profit has a 5% chance of being closed -- per bar. What would this do to the expected profit per position? Are some probability formulas able to provide much better returns?

Remember, we're talking about trading a maximum density of positions while prices move through our trading space. We know our total position, our total risk, and simply want to allow our winners to run as much as we can based on historical price movement patterns. Basically, we know that prices range for a while and then take off up or down. It's the multi-day upward movement that we want to catch... letting go of positions slowly during smaller moves until we can eventually latch onto a bigger move.

I'm probably about 85% into building a new robot based on this concept. I like the measured aspect of this on the risk side. I like the less definable profitability expectation -- it's beyond my math skills at any rate -- which is suggestive of an ability to preferentially capture larger profits. I also like that it should continue to eek out smaller profits if the price decides to languish in a smaller range for some period of time.

Maybe I'll be able to fire this up on Monday.

AUDJPY: Range Or Reversal?

The AUDJPY has had a nice run just recently.

However, the 1HR is showing a small double top. Obviously, we might be looking at the beginning of a range discovery action or perhaps even a reversal if we get renewed panic concerning Greece or similar situations.

Be patient and look for good opportunities.

Now if only I can take my own advice... ;)

AUDJPY: A Change Of Mind

Finally, something has happened to lift the pall from the AUD/JPY market.

What happened? The Australian economy showed signs of heat. We have recent employment numbers that absolutely blew away expectations.

Apparently, today, the AUD/USD moved from a value that gave a 25% chance of a hike in march to a 50% chance of a hike in march.

Do you remember me talking about the need for a upside surprise to start movement off a possible bottom? In order to continue upward all we need is some nice stats from China and the lack of a new crisis of confidence.

There is a lesson in this -- as if you don't know this already.

When the world has given up and this has been priced in (baked in) there will be a good chance to grab an upside move. The employment report could have been traded by taking a position with a reasonable stop prior to release... if you thought employment was going to be strong (hopefully because you had insight or evidence instead of just raw gambling).

My insight offering would be that a ship the size of China doesn't turn around overnight just because of some tightening. Alternately, tightening credit in China with an aim to keeping growth at 8% or so isn't tightening in the same sense that we'd consider it in the western world.

This was an obvious and big miss...

What I see is an opportunity to figure out some of the blind spots that the big money has -- let them spend their powder moving the herd and then pick a good point to have their mistake revealed, such as Australian employment stats, and take a stop protected position on it.

AUDJPY: Oh Oh

While I've been talking about the cake being baked we've just done nice big double top over the course of October 2009 through February 2010 on the daily charts.

Obviously, this doesn't have to "fire" but it does invite a big panic drop to retest the July 2009 low of 70.75 or so. Considering today's rapid plummet of 300 points at this point who can say.

As I noted on my last post I do think people are being too pessimistic. However, they can panic and be pessimistic far long than I can stay solvent if I bet against them. Be careful out there.

AUDJPY: The Cake is Baked

Well, the RBA just decided not to increase rates.

Recently, China decided to tighten up capital requirements for lenders.

Also, there has been talk of taxing or otherwise restricting carry trade activities.

Lest we forget, recent news in Australia is mixed.

The US market has been skittish.

Emerging markets have been very skittish.

So, what am I trying to say?

I'm thinking the cake is baked. You might want to let the dust settle from the RBA decision -- but I think we have become overly pessimistic. We are so pessimistic that all the bad news and presumptions of bad news should soon be baked into the price of the AUDJPY.

All we need now are some upside surprises...

UPDATE: It's thursday morning and we are having a nice panic day apparently due to a less than stellar jobs report. I think the panic is unnecessary but I do understand the lynchpin that is being attacked here. If jobs don't come back then how can the economy recover? However, I think they have it backwards, as we do see spending continue to recover, which should after a lag lead to jobs. Obviously, the market can stay irrational far longer than you can remain solvent, so don't jump in just because you have a long term belief (as I do).

I guess the cake is baking, but not yet ready to come out of the oven.