Weekend Notes

I've been through a lot of (non-trading) issues since I last wrote.

My family and I have moved halfway across the nation, we've gotten new jobs, and had to take care of a million minor items that occur when you relocate your life. Sorry for the lack of updates.

I have been doing a little manual trading here and there.

The AUDJPY has been failing in the 87.xx range for most of this month. Greece, Goldman Sachs and various other items are scaring risk takers while continuing signs of improvement placate them. I'm expecting an eventual spike once the 87.xx resistance is overcome -- so I'm very willing to open long positions when we pull back into the 83.xx, 84.xx or 85.xx zones.

On another note... trading seems to be getting "easier" as time goes by.

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.

AUDJPY: Signs Of A Bottom?

First, I have to warn you, I'm eternally bullish on the AUDJPY. This means I'm wrong on my predictions a fair amount due to my long term viewpoint.

With that said, I've noticed a chart sign that implies some possible upward movement.

Take a look:


It may not be easy to see, but notice how the recent tails, at 09:00, under the last few candlesticks did not project below the closing prices during a recent, at 03:00, previous low?

Up until now, for days now, we'd see the close of each new low at the level of the tails of previous lows. This doesn't mean we can't go further down -- especially during the Asian session. However, it does mean that we have the potential to be running out of downward pressure.

If so, whether it is short lived or not will depend on upcoming news and the impact this has on the sentiment of traders. As you know the political unrest in the US and the tightening in China has set the mood negative lately.

UPDATE: Boom. Instant downward movement to invalidate my sign. The fact it showed temporarily may hint at trend weakening. We do have a fair amount of gloom and momentum to work through.

UPDATE: It's now 23:00 and AUDJPY has just risen to just under 81.60 which would seem to suggest that downward pressure had indeed been flagging. Of course, nothing goes straight up or straight down... but trading 100+ point moves is rather nice.

AUDJPY: Poised?

I don't have time to snip a chart or anything, however I'd suggest taking a few moments to analyze the AUDJPY.

What I see is the potential for a so-called "big W" on the 3 hour chart. You'll notice the right side of the W has a double bottom. If we do get the full "big W" we should see some dramatic upward movement over the week.

Fundamentally, inflation, employment and other indicators in Australia seem to indicate the need for the RBA to continue to increase rates. If any more hot growth news comes out prior to February we may see speculation on a 50 basis point increase instead of the widely expected 25 basis points.

In summary, look for a safe low-risk entry point if your analysis of the charts agrees (or even disagrees) with mine.

UPDATE: If you disagreed with me you'd be happy with this morning's (Jan 20) breakdown... though so far the next resistance point seems to have held.

AUDJPY: Technical Analysis

Well, my posts are few and far between these days.

In case anyone else is still following long here is some good information on the 3hr AUDJPY.

We have a nice symmetric triangle going all the way back to November 25th.

See?


I'm expecting this to break (upward) and then run into a downward sloping resistance line on the 1d AUDJPY. However, we'll have to wait and see. I've been wrong (more than a few times) before.

UPDATE: Here we have the price dropping, on the 1hr, giving us a good entry point. We can easily set a stop loss relatively close while targeting the upper boundary for profit. However, as there was news earlier, we may find that the support line yields to changed market expectations.


UPDATE: The bar isn't closed on the 1hr but it's almost 11:00pm ET and it looks like we are breaking downward at the moment.

Challenging Times

While I realize the world went through a bit of an unwind, before and after the Dubai incident, I've been busy with work and family issues instead.

Things have just been incredibly busy!

In any case, what with the volatility and unwinding that has been going on it's probably a good time to be inactive. I did manage to blow up my small discretionary account (my robots are far better traders than I am) but that's insignificant.

However, the big news, from my own point of view, is that I have some tweaks for my up-and-coming robot. Basically, I need it to detect a downward slide quickly and then decide not to waste it's risk capital on redundant positions.

Maybe I'll have some time to do some blogging and tweaking this week?

Trading Week Recap

I've been leery of letting BREAD (my primary trading robot) trade too much. I suspect prior tweaks have it taking too much risk. As such I kept it on a short leash and it only earned 0.9% for the week. Perhaps I'll have time to make some adjustments over the weekend.

On the discretionary front I was back down to a more reasonable 13% this week. Last week's 34% was probably some type of market movement vs trading style confluence. These thing happen.

In other news I have a new Bollinger Band based robot in the works. An early version of it was trading this week -- earning almost %1 as well. More trials and adjustments to look forward to!

UPDATE: No time to do anything Forex related this weekend.