What's happening in the current markets? Archives - Algorithmic and Mechanical Forex Strategies

Cryptomania – The Fear of Missing Out

December 8, 2017 by Shaun Overton 7 Comments

Cryptomania provided me with the largest percentage gains in my trading career. Back in June 2015, I decided to spend $1,000 on a punt. I said, “Bitcoin is either going to $0 or $10,000.”

That was back when bitcoin traded at $283, which bought 3.619 bitcoins. At $10,000, that woulda coulda shoulda meant $36,200 dollars in my pocket. Here’s my offline (and now defunct) wallet so that you can see the activity: https://blockchain.info/address/1LzhWxzdCoPtfVRTu9dxMTRKZoe8oQiEmn

Notice that the first transaction date was in January 2017. I originally purchased those coins through an exchange called Coinsetter. That business was purchased by Kraken, but it wasn’t until about a year later that I grew paranoid enough to take over complete security of my coins.

Bitcoin’s main purpose is to eliminate the need to trust a 3rd party like a broker. Once I grew comfortable using wallets (I recommend Electrum) and especially the idea of cold storage, I finally put my investment completely into the blockchain.

Did I really turn $1,000 into $36,000?

A Big Enough Win

I sold my bitcoin last week at an average price $9,775. It looks like my final profits will total around $28,785.35. Doesn’t that seem oddly precise for an estimate?

So far, I’ve withdrawn $19,727.17 into my bank account with $9,058.18 in cash stuck at the exchange.

The money remaining to withdraw from Kraken

Because of an inexplicable hangup verifying my identity, I’m limited to withdrawing $5,000 in cryptocurrencies per day from Kraken. Ok, so I withdraw crypto from Kraken to where exactly?

In order to turn paper profits into actual dollars, I have to transfer some form of crypto into Coinbase. Coinbase is where I did successfully verify my identity. It’s not ideal because they charge a massive spread of nearly 5% of the value. I want to get my money out and that’s my only method. You just suck it up and pay the fee. At Kraken, the spread cost of Ethereum is around 0.25%.

My super convoluted process of getting the cash out is:

Turn the cash at Kraken back into crypto so that I can transfer the value to Coinbase. That means buying Ethereum because it has the fastest confirmation time.
Jump through a number of Kraken pages to submit a withdrawal request
Wait for Kraken to send the withdrawal
Wait for Coinbase to see and credit the Ethereum transfer to my account
Sell the Ethereum at Coinbase by paying a massively marked up spread.
Wait another day for dollars to show up in my bank account

Transfers from Kraken

Transfers to Coinbase

The reason I’ll wind up with about $28,000 in profit instead of ~$36,000 is that I decided to diversify across different cryptocurrencies in the summer. Monero was a huge win for me (bought around $75, sold for $297). Ripple, Stellar Lumens and Ethereum significantly underperformed bitcoin. Whenever I re-enter the cryptocurrency space again, I will do so across multiple assets. What I won’t replicate is diversifying amidst mania. That needs to happen when the markets are totally boring. I underperformed my target because I made a bad decision.

Last week, I went ahead and sold all of my bitcoin as the price approached $10,000. My average exit price was $9,975.

Yesterday, bitcoin touched $19,000 on some exchanges. Doesn’t that drive me crazy that I woulda coulda shoulda double my already significant winnings?

I confess to a small bit of “if would’ve been nice if I hung on longer”. But when I look at the charts, there is 0% chance I would have held on until today. And, there’s noooooo way I’d hold it over the weekend.

I’ve seen many parabolic markets before. I never time the top – it’s best to get out when you already have a massive win locked up. The way I make money is on the entries, by purchasing things when they’re quiet and boring.

The best counter example is from back in 2009. I caught the monster move in the silver ETF (SLV) when it traded in the high 20’s. Instead of buying the ETF, I started buying slightly out of the money calls.

As my out of the money calls became at the money calls, I would sell that strike and roll it into a higher strike. Rinse and repeat.

Soon, my $1,000 punt was up to $6,000. The market was absolutely insane. I knew it was crazy. I knew it was parabolic. But, I was afraid of missing out on even more profit. And so, I put stuck my head where the sun don’t shine and watched up profits evaporate.

Do you know where I finished that silver trade? $800!!! I lost money on a trade that had earned over $5,000.

That will not happen to me again!!!

This current bitcion craze is driven by the CBOE launching bitcoin futures on Sunday. In my opinion, this is an extreme case of buy the rumor, sell the news. So much can go wrong on the futures launch.

The futures market brings phenomenal quantities of capital into the market. Most professionals will not buy breakouts. The near universal consensus is that bitcoin futures supports the bullish case. As a dedicated contrarian, I predict that it’s profoundly bearish simple because everyone is so confident about the bullish case.
Many of the spot exchanges offer leverage. What if there’s a massive panic and liquidity evaporates FXCM style? Leverage + Volatility leads to bankrupt businesses. If your money gets locked up in a bankruptcy proceeding, you won’t see that money for years. And when you do, it’ll be pennies on the dollar.
People always hope to trade the top. But, you know what’s common with tops? Liquidity is super thin. Most of the depth of market on Kraken’s bitcoin is only worth a few thousand dollars deep. Even a small fish like me with 28k would sweep most of the order book. It’s completely unrealistic to expect a decent fill in fast market conditions.
100% of the coin exchanges are overwhelmed by the traffic. I see this “trading screen of death” more often than I’m able to log in to my Kraken account.
The trader’s death screen. “We know the markets are volatile, but our network engineering doesn’t support spinning up new servers when needed. Oops”
The uber-bullishness extrapolates that leverage from the futures market goes into the bullish case. What happens if one of the large prop trading firms applies a few billion in capital to smashing down the price? Joe Retail in the US and Ms. Watanbe in Japan will puke their positions. This 4 year run-up in the price will crash with breathtaking speed if the institutional money comes in bearish.
Converting crypto into fiat currency is a massive pain. Exchanges like Kraken have the absolute worst customer service in the world. I wasn’t able to complete a withdraw order yesterday because I had a limit order to sell the handful of ethereum in my account and forgot about the order. When I tried to transfer ethereum into Coinbase, Kraken gave me the error message “Insufficient funds”. WTF? I had nearly $15,000 in the account at the time. Customer Disservice takes WEEKS to reply to questions if they reply at all. The only reason I was able to resume withdrawals is that I remembered that the pending order tied up my unused margin. Otherwise, I’d be sweating bullets again this morning wondering how to get my money out.

The fear of missing out on another 25k in profits could have kept me in the market. But I wanted to write this as a trading journal entry to document that I am honestly and truly happy with the outcomes of my cryptotrades. It could’ve been better, but losing $20,000 sounds twice as bad to me as making $20,000. I’d rather use that money to retire 100% of my non-mortgage debt and fund my next punt: long May VIX futures.

AUD/USD short-term outlook based on recent economic reports

August 29, 2016 by Shaun Overton Leave a Comment

Before commodity markets started cooling off last year, the multi-decade commodity boom drove the Australian Dollar to all-time highs against the US Dollar severally. This caught the attention of the traders who were in many cases attracted by the interest rate differentials in the AUD/USD pairing. The duo benefit of this was that traders could take a long position on the AUD/USD and earn rollover from it; while at the same time gaining from the aggressive bull-run experienced then between the pairs.

The Australian Dollar (Aussie) has however in the recent past been subjected to negative economic outlook back at home due to the bear markets in the commodities markets especially the metals. The slow-down in the Chinese economy as they restructure their economic model to boost their local consumption also had negative impacts on Australia’s commodity exports; resulting to more pressure on the Aussie. This is a reversal of the past when the currency had been identified as one of the favored vehicles for traders.

The AUD/USD currency pair has been trading within the range of 0.7600 and 0.770 in the past weeks. The currency pair has appreciated by about 5.34% for the year-to-date. Recent developments in Australia and United States of America economic environments however have been shaping the AUD/USD price actions and affecting sentiments from the traders. Among the top economic news from Australia that will shape how the price of the pair will be fluctuating into the future include the decision by the Reserve Bank of Australia to cut the interest rates to 1.5% on August 2nd 2016. On the other hand, the US released better than expected payroll’s data for the month of July 2016 and that has had a positive impact on the dollar. Both these two major announcements will be shaping the trend of the pair in the markets in different ways and ultimately they will affect your trading decision on the pair.

In a bid to boost consumer confidence and stimulate a consumption driven economic growth, the Reserve Bank of Australia cut its interest rate to 1.5% in August 2nd 2016 after another cut in May 2016 to 1.75%. The goal of the bank is to increase money supply in the economy and boost the purchasing power of consumers in order to trigger an increase in production and hence ultimately end up with higher GDP growth. It is however feared that the move will result in inflation rising hence rendering the monetary policy intervention counter-productive. With the rising inflation the Australian Dollar would eventually find itself hurt through depreciation against other major world currencies including the US Dollar. To dispel the inflation fears, Mr. Alan Oster the chief economist at the Reserve Bank of Australia said that “the outlook for inflation remains very subdued with underlying inflation expected to remain below the bottom of the 2 to 3 per cent target band until mid-2018.”

On the US economy, the labor department released the July jobs report on August 5th which was a record higher than the projections from economic analysts. The report showed that the US created 255,000 new jobs in the month of July 2016 against a forecast of about 180,000 jobs by most analysts. This data caught the market as a surprise and triggered an upward rally at the equities markets across the US. Having the payrolls expanding is therefore a proof of the confidence that both the US public and private sectors have in their economy and this re-affirms the position of the United States of America as the strongest economy in the world. The dollar is now rallying on such positive news and hence gaining more ground against other major global currencies as explained by AOMarkets in their analysis, “A resurgent USD is dominating financial news headlines and US indices are enjoying the spillover effects.”

Taken together, the AUD/USD currency pair seem to be leaning favorably on one side based on the just released economic data from both the US and Australia. The USD is riding on positive jobs data and the implied strengthening of the US economy. On the other hand the AUD is faced with potential depreciation if increased borrowing due to the rate cut results in an increase in spending that might trigger inflationary pressures. In the short-run we can therefore expect the USD to rally against the AUD before the election fever peaks in the US.

Things to Know Before Trading Silver

August 8, 2016 by Lior Alkalay 3 Comments

If you think Silver trading is almost identical to Gold trading, you are wrong. But if you think Silver is utterly different you are wrong, as well. Confused? Don’t be. Trading Silver has a lot of similarities to trading Gold but there are two key dimensions that impact the way Silver behaves in relation to Gold—volatility and the Gold-Silver ratio.

Trading Silver: Volatility

Below is a comparison of Gold and Silver volatility levels. It’s hard not to notice that Silver is substantially more volatile than Gold. The reason for that is because liquidity in Silver futures across the exchanges is substantially lower than Gold futures. This, of course, means that smaller amounts (albeit still in the billions) can move the price of Silver much more than Gold. As a trader you should accordingly adjust your strategy to higher volatility.

In practice, Silver’s higher level of volatility first and foremost has an implication on stop losses. Because higher volatility tends to trigger more stop losses it means more margin of safety is needed when you place your stop loss. In other words,if you are trading silver, you have to place your stop loss a little further to make sure a sudden burst of volatility won’t throw you off the trade only to later hit your market. Of course, this also means you might reconsider certain trades, because if your stop loss is now further from your entry but your limit stays where it is your risk reward ratio is now lower and that could mean your trade is not necessarily worth it.

The second noticeable impact of higher Silver volatility is the manner in which Silver trends behave. Both Gold and Silver have a tendency to move in bursts of momentum but in Silver, the bursts tend to be stronger because of the higher volatility. As can be seen in the example below, both Gold and Silver eventually gains more or less the same percentages. But while Gold’s ascent was more gradual, Silver lagged Gold only to catch up with it later, in a fraction of the time and with a strong burst. This, of course, can be of great value for the Silver trader, especially one who can exploit such opportunities to make a rather quick gain from Silver catching up with Gold.

Gold-Silver Ratio

Perhaps one of the most important ratios in the commodity space. The ratio, as its name implies, measures the price ratio between Gold and Silver. In other words, how much Silver is Gold worth? Why is that ratio useful? Because the ratio between Gold’s price and Silver’s price moves in cycles (see chart below).

When the ratio is at cyclical lows Silver is relatively cheap compared to Gold. In a bullish run it usually means that Silver’s price has more upside and will therefore outperform Gold. The same goes for a bearish trend. When the ratio is at cyclical highs then Silver will underperform Gold, both on the way up and on the way down. Therefore, watching the Gold-Silver price ratio allows you to gauge the potential momentum w

In practice, this means you can expect Silver to outperform Gold when the Gold-Silver ratio is at cyclical highs. A classic example occurred in 2011 when as the Gold-Silver chart was at record lows (see above) which resulted in Silver outperforming Gold on the way up (see below). As the ratio gradually moved into cyclical highs, Silver started to underperform Gold again.

The Bottom Line

Sometimes, Silver just moves too high too fast. When that happens it’s better to bail out before the burst. On the other hand, sometimes Silver lags, so much so that you have to ask is it worth riding on volatility to catch up? The key to trading Silver is understanding its similarities with Gold but exploiting the differences between the two.

How to Trade the GBP after Brexit

July 12, 2016 by Lior Alkalay 2 Comments

The selloff in GBP pairs after Brexit presents a challenge for a trader. At first glance, the strategy for the key GBP pairs, mainly that of the GBP/USD and GBP/JPY, should be simple. The GBP is in vertical short, falling almost in a horizontal line; therefore, the trader should apply a vertical short strategy. But when it comes to the GBP, and for that matter, any pair trading at multi-decade lows, the game plan should be slightly different. So without further ado, here are some tips to trade the GBP after Brexit and any pair that is under its historical lows.

GBP: Two Risks

In the aftermath of the GBP Brexit meltdown, GBP pairs, such as the GBP/USD, have two major risks that we have to navigate around – direction and momentum.

Direction – Since we are talking about multi-year lows, we cannot know when the bottom will emerge, because the pair is in uncharted territory.

Momentum – Again, we have no way of knowing when the momentum will change from vertical bearish movement to a trend to a possible range bound.

So how do we handle those unknowns? We use strategies that minimize the risk from the elements.

Buy on Hammer Reversal

As we can see in the chart below, and as is common when a vertical short occurs, after the vertical short comes a brief bounce. What indicates that that bounce is coming is a hammer reversal candle. A hammer reversal candle is a candle where the middle is long and the opening price and closing price are very close. Once we get a hammer reversal candle we can expect a small bounce.

To increase our confidence in an upcoming bounce we can and should combine a MACD indicator. If the MACD indicator suggests weakening momentum, we get a confirmation. Once we get our confirmation it is a signal to buy; our limit should be set below the opening price of the first full bearish candle of the latest vertical short.

Why should we use this strategy? When we have no indication as to when the pair will bottom out, it’s hard to take a short without risking a sudden bounce back. Normally, it’s less advisable to trade but, under the current conditions, this pattern gives us a chance to reduce the risk of the unknown and minimize the time we are exposed to a choppy market.

Sell on a Major Pull Back

At some stage, every short, no matter how strong, gets a major pull back. That will be our first real opportunity for a short entry. Once we get a major reversal, and by major I mean at least 38.2% of a Fibonacci retracement, then we will get our opportunity to short. That’s because no bearish trend ends without at least two attempts at the same low. That means that, at such a stage, we are no longer in an unknown and our target is the pair’s lowest point.

It’s important to note that when a pair experiences a major retracement it usually signals the end of a vertical short movement and thus is a signal for us to stop using our hammer reversal strategy.

Our limit is now known, aka the low of the pair. And our signal to short can be varied, as in trading a short under any other circumstance. Oscillators such as the MACD, Average True Range and the Stochastic Oscillator can help us time the resumption of the bearish momentum and ride the bearish wave.

But what’s important to understand here is that after a major retracement, it’s much safer to start trading on a longer term and ride a bearish wave.

In Conclusion

Although those insights have been implemented on the latest meltdown in GBP pairs, the tactics we learned here are not only useful for the GBP but can prepare you for the next FX pair meltdown, whether it’s the Euro pairs or the Brazilian Real pairs. What those tactics teach you is how to trade a rather risky situation with plenty of uncertainty. Sure, it is still risky to trade a currency in a meltdown, but at least, with the tactics above, you can avoid the major pitfalls.

Trading Lessons from the Latest Gold Spike

February 19, 2016 by Lior Alkalay 10 Comments

After a relatively long period of calm, Gold has come back from the dead. Half way through February, Gold prices have spiked by more than 12%. This, of course, has got some traders scratching their head, wondering where the heck the spike came from… as if Gold moves materialize out of thin air.

Well, Gold moves don’t just “happen.” In fact, the latest spike in Gold price provides some powerful trading lessons on trading Gold.

Charting Gold Volatility with MT4

Before we jump into the lessons to be learned let’s first focus on the cycles of Gold. That should help explain the latest Gold Spike. Despite what you may have heard, Gold does have cycles. Surprisingly, the cycles are not in the price itself but in the level of volatility. In the past, I expanded on the advanced use of derivatives to predict an upcoming Gold move and direction. But the lesson here is far simpler.

In the weekly Gold chart below, we have measured Gold’s volatility through Standard Deviation (or StdDev), which is available in MetaTrader.

As one can see, Gold’s StdDev is remarkably simple to analyze. Every time the StdDev falls to 20 it jumps back up. And every time Gold’s StdDev jumps to 80 it falls down, back to the 20 low. The only exceptions were two extreme cases when the StdDev reached 145.

Moreover, we can see that if StdDev has hit lows more than once the spike of volatility higher is almost certain.

Source: MT4

First Trading Lesson

Of course, our StdDev analysis is not unique to the latest spike. But what can we learn? The first interesting lesson is that volatility spikes tend to concentrate around resistance/support levels. In our case, that is the 1,050 support, aka Point A. That means that Gold opportunities tend to occur around support and resistance levels. Now, it may seem an obvious conclusion but here is what it actually means:

When you have a support or resistance level and StdDev is at 20 that’s the ideal time for entry. You will have both textbook support and resistance levels working smoothly. Then you’ll know that a strong momentum is coming.

Second Lesson

The second lesson is a simple but important one. A spike in Gold volatility does not necessarily mean a break of support and resistance levels. When technicals suggest that the support level will hold look at the StdDev. If the StdDev is at 20 that’s good; it re-enforces that simple fact that the support level will hold.

Third Lesson

The third lesson, which combines the first two, is perhaps the most interesting. It is the understanding that one jump in StdDev is not equal to one move. Let me elaborate; say StdDev has hit the 20 low near the 1,050 support. Meanwhile, Gold prices have spiked but StdDev hasn’t yet reached the 80 high. That means that volatility is set to rise but it doesn’t necessarily mean that Gold will keep moving in the same direction.

Rather, it means it will just move with a strong momentum. In the case above we can see Gold has hit the upper price channel resistance at Point B. But StdDev suggests volatility still hasn’t been maximized. And that means that the rise in volatility, next time, could come in the form of a short.

What Did We Learn?

So if we take our three lessons and try to summarize them, what did we learn? We learned that when StdDev is at its 20 lows it’s the best time to trade Gold. That’s because it guarantees that you will get a strong price momentum and it validates your technical analysis on Gold.

The Top 27 Forex & CFD Trades of 2015

December 7, 2015 by Shaun Overton 2 Comments

Here’s a list of all the trades you wish you made in 2015. What good is a list like this?

Because it helps you find the best trades next year!

Let’s dive in.

1-EUR/USD, April 13, Daily

On April 13th after a marathon of negotiations and concessions it seemed that Greece will eventually not leave the Eurozone after all and the abyss was averted. Sensing an opportunity to buy the Euro at its lows, hedge funds, big banks and other institutions began to buy billions of Euros. The EUR/USD jumped more than 900 pips in 3 weeks.

Weighted Digital Score: 5.0
SB Score: 0.46

2- XAU/USD, October 28, Daily

After some tentative signs of improvement in the US economy, on October 23rd the big movers on the Gold market reached the conclusion that the Fed would raise rates before 2015 ends. This leads to a massive selloff in XAU/USD contracts with Gold melting $100 off its price.

Weighted Digital Score: 73.5
SB Score: 0.11

3- USD/JPY, May 18, Daily

On May 18th, after soft data from Japan, traders concluded that the Bank of Japan was about to amp up its efforts to weaken the Yen further. Meanwhile the US Dollar was looking solid. Traders responded to this situation by massive bullish bets on the USD/JPY, pushing the pair 600 pips higher.

Weighted Digital Score: 11.0
SB Score: 0.93

4-USD/JPY, August 19, Daily

Shortly after traders were almost certain that the Bank of Japan would act to weaken the Yen, their hopes were dispelled. The BoJ decided not to act and USD/JPY bulls were caught off guard. On August 19th a panic selloff on the USD/JPY began and the pair plunged from 124 to 116 in the space of 4 days.

Weighted Digital Score: 48.0
SB Score: 0.13

5- AUD/USD, September 29, Daily

After being sold heavily for several weeks AUD/USD selling reaches an exhaustion point. The threat from a slowing China on the Aussie dollar now seems fully priced in the pair and appetite for selling diminishes gradually. On September 29th as sellers move to the fence bulls seize the opportunity and push the pair for a quick rebound above 0.73.

Weighted Digital Score: 38.0
SB Score: 0.50

6- Oil, August 24, H4

On August 21st just before the end of summer investors concluded that Oil prices have moved too low too fast. Adding on top of that the tendency for Oil to gain during the winter months investors were expecting a rise in demand. Consequently the bulls pushed oil by $10 a barrel in a very short time span.

Weighted Digital Score: 28.6
SB Score: 0.31

7- EUR/GBP, October 9, H4

With data from the Eurozone constantly deteriorating and data from the UK brightening, EUR/GBP traders have begun to bet on more stimulus i.e. easing from the ECB and on the contrary a possible rate hike from the Bank of England. Consequently traders began to short the EUR/GBP, heavily pushing the pair to the 0.7 low.

Weighted Digital Score: 70.0
SB Score: 0.80

8- GER30, September 29, H4

As optimism grew over a possible ECB stimulus, appetite for the GER30 (DAX) jumped, pushing the index above 10,000.

Weighted Digital Score: 39.0
SB Score: 0.41

9-USD/CAD, January 2, H4

As Oil prices began to slide, the Canadian Dollar, which tends to move in tandem with Oil, moved lower as well. That pushed the USD/CAD by roughly 1000 pips.

Weighted Digital Score: 42.2
SB Score: 0.70

10-UK100 (FTSE100), August 13, H4

Selling pressure on miners alongside fears the FTSE100 was in bubbly territory ignited heavy selling in the UK100 contracts (FTSE100) 800 points lower.

Weighted Digital Score: 86.26
SB Score: 0.71

11-USD/CHF, October 20, H4

After inflation in Switzerland fell below 0%, traders concluded the Swiss National Bank would be forced to keep its negative interest rates lower for longer. This, of course, makes the CHF a clear sell vs the Dollar which faces the opposite circumstances. The USD/CHF consequently rallied roughly 600 pips.

Weighted Digital Score: 5.0
SB Score: 0.02

12-XAU/USD, August 5, H4

When Gold reached the 1080 support zone, Gold traders realized the next stop if the support breaks was 1000 and below. Fearing the possibility that the Fed will eventually fail to raise rates, traders quickly turned from bearish to bullish pushing Gold contracts to trade just shy of $1,172 per ounce.

Weighted Digital Score: 30.8
SB Score: 0.49

13-EUR/USD, October 22, H1

On October 22nd, believing that the ECB was about to embark on more stimulus and with solid data coming out of the US strengthening the case for a Fed rate hike, the EUR/USD resumed selling, plunging roughly 500 pips.

Weighted Digital Score: 39.6
SB Score: 0.02

14-USD/TRY, August 12, H1

On August 12th Turkish Lira bears were betting more uncertainty for Turkey which of course is highly negative for the Turkish Lira. As a result, the bullish trend on the USD/TRY quickly resumed.

Weighted Digital Score: 6.0
SB Score: 0.52

15- GBP/USD, November 5, H1

After realizing a rate hike from the Bank of England was not coming soon and eyeing a Fed rate hike by year’s end, short sellers began to home in on the GBP/USD, with a 350 pips short in less than 24 hours.

Weighted Digital Score: 46.0
SB Score: 0.80

16- EUR/JPY, November 16, H1

During mid-November data from Japan was surprisingly negative and ignited safe haven bets that ironically pushed the Yen higher, pushing the EUR/JPY lower.

Weighted Digital Score: 65.8
SB Score: 0.79

17- NZD/USD, October 29, H1

On October 29th China announced it is abolishing its one child policy. Since New Zealand’s main export is milk to China, i.e. food for young children, traders immediately figured this was NZD positive and started piling on bullish bets for the NZD/USD.

Weighted Digital Score: 18.0
SB Score: 0.26

18-AUD/JPY, June 2, H1

After a hefty selloff, the AUD/JPY became oversold. This generated a classic short squeeze, ignited a wave of buying for the pair pushing it to rise above the 96 level.

Weighted Digital Score: 24.6
SB Score: 0.45

19-XAGUSD, October 28, H1

As appetite for precious metals evaporated once again and dollar bullishness resumed, Silver spot price (XAG) was pushed lower from $16 per ounce to just above $14 per ounce.

Weighted Digital Score: 99.5
SB Score: 0.44

20- Oil, November 4, H1

With EIA stockpiles on the rise Oil traders returned to bearishness once more. Short selling resumed around the 48-49 area and pushed WTI Oil to trade as low as $ 42.37 per barrel.

Weighted Digital Score: 73.09
SB Score: 0.05

21- USD/NOK, September 21, H1

After the USD/NOK bottomed out on September 17th bearish momentum was exhausted, largely due to fading Oil demand. On September 21st with the dollar looking bullish, traders returned to the long term bullish trend for the pair, pushing it above the 8.5 level.

Weighted Digital Score: 6.5
SB Score: 0.36

22- EUR/GBP, August 5, H1

After some mild data from the UK, EUR/GBP switched into bullish bias, believing the EUR/GBP was oversold. The pair moved from below the 0.7 threshold to above 0.71.

Weighted Digital Score: 15.7
SB Score: 0.45

23- USNASDAQ100, October 1, H1

As the third quarter ended, traders were expecting a robust earnings season for tech companies. Consequently the USNASDAQ100 CFD contract that replicated the Nasdaq100 index embarked on a bullish run from 4,115 to 4,633.

Weighted Digital Score: 4.96
SB Score: 0.0

24- Japan225, May 8, H1

As the Japanese Yen weakened i.e. the USD/JPY moved higher, traders realized that this would be positive for Japanese companies and consequently turned bullish. The Japan225 CFD, which replicated the Nikkei 225, gained roughly 1200 points.

Weighted Digital Score: 25.9
SB Score: 0.32

25-AUD/NZD, September 24, H1

Between the Aussie and the Kiwi, the Aussie is the most sensitive to bad news coming from China. So when traders began to be pessimistic on China, they followed by shorting the Aussie vs the Kiwi, pushing the pair lower.

Weighted Digital Score: 12.12
SB Score: 1.0

26- USD/CHF, July 31, H1

On July 31st, after forming a double bottom, traders resumed their bullish bias on the USD/CHF in tandem with the bearish EUR/USD bets, as both pairs tend to move in reverse.

Weighted Digital Score: 2.5
SB Score: 0.35

27-EUR/USD, August 24, H1

Towards the end of August, the EUR/USD topped out for the year. Markets once again turned risk averse; traders began piling in on safe haven currencies such as the Dollar and the Yen and sold risk currencies such as the Euro or the Aussie. Consequently, the bearish trend for the pair resumed, pushing it lower by roughly 600 pips.

Weighted Digital Score: 100
SB Score: 0.73

November Performance Review

December 1, 2015 by Shaun Overton 4 Comments

QB Pro return -6.59% for November. My goal of hopping on board the commodity trends was late to the party. Starting October 1, QB Pro traded a mix of AUD, CAD and NZD. That portfolio mix resulted in losses because those currencies have remained range bound from October until today.

Performance of AUD crosses

Performance of CAD crosses

Performance of NZD crosses

Although QB Pro is a mean reversion strategy on the H1 charts, its performance depends massively on long term trends. My biggest challenge on the first of every month is to make sure that my portfolio allocation makes sense for the current environment.

CAD is still near the upper end of where the current trend peaked. I see no fundamental or technical reason why the CAD trend is topped out. Yes, I may need to sit through some minor up and down months; the price might consolidate around 1.30 to 1.33. Then again, it might start zooming upward again. Whenever the trend resumes, I fully expect CAD to continue its trend in the same direction.

CAD is still in a major, long term uptrend. This chart is USDCAD daily

The strongest trend in the market right now is CHF weakness. There are plenty of fundamental reasons to dislike CHF. An interest rate of -0.75% is chief among them. But… that’s also old news. Nothing on CHF fundamental front has changed. I feel like I’m rationalizing, so I’m just going to skip the analysis and go with what the chart says. The USDCHF is trending up and, as of a few days ago, broke through the previous high before the collapse of the EURCHF peg.

CHF is breaking out again

Recent backtests of the QB Pro system on a CHF portfolio look excellent. The backtest below only covers the most recent 3 months.

QB Pro equity curve for CHF since September 1, 2015.

I feel like we’re in a good position portfolio-wise. This is not an empirical observation. It’s more of a feeling. It feels like my likely downside is limited, that if I do lose, it’ll be small. And if I do win, that it’ll look a lot like my earlier winning streak.

If you signed up for the QB Pro system on SeerHub, your portfolio will be automatically updated.

How to be 99.999% accurate when your system is only 49% accurate

November 16, 2015 by Shaun Overton 9 Comments

Virtu Financial, the high frequency trading firm whose initial public offering of stock was caught in the unexpected firestorm that was the book “Flash Boys” by Michael Lewis, is reviving the IPO plan they shelved last year amid controversy, is seeking $100 million.

99.999 win percentage is an odd statistic

As a recent Securities and Exchange filing reveals, the company, operated by a litany of some of the exchange world’s top executives, boasts that out of 1,485 trading days it has only one losing day. This is the key statistics that left those familiar with algorithmic trading scratching their heads.

On the surface this 99.999 win percentage is a rather unworldly performance statistic in the world of algorithmic trading.

Virtu Financial is not a trend follower

The most popular managed futures strategy, trend following, has an average win percentage near 55 percent. Trend following might not be the best algorithmic strategy to compare to Virtu, however, as the firm claims in its S-1 that their trading “is designed to be non-directional, non-speculative and market neutral.” Micro-trend following and benefiting from market moves in one direction is a popular high frequency trading strategy, but based on their S-1 this is not the primary strategy.

This doesn’t explain the win percentage.

The highest win percentage of all managed futures strategies, near 75 percent, is short volatility, which is also the least popular strategy. While the strategy is known to win most of the time, the key statistic is to understand its small win size and large loss size. In managed futures the size of a trader’s wins can often be more important than how often they win. In the case of short volatility, while they win most of the time, when they lose they lose big – with an average loss size that is close to double that of a discretionary trading category, for example.

While risk in Virtu may exhibit strong downside volatility during crisis, much in the same way market crashes bankrupt many individual market makers in the golden days of the trading floor, comparing Virtu’s strategy to a short volatility strategy is inaccurate.

Perhaps the most applicable managed futures strategy to benchmark might be the relative value / spread arbitrage category. The spread-arb strategy has a high win percentage, near 60 percent, and it also has the best win size / loss size differential. The strategy works by buying one product and then selling a related product. The directional strategy works when a market environment of price relationship dislocation occurs.

While the fit isn’t perfect, nonetheless the most relevant managed futures strategy for which to compare Virtu is its direction-less, market neutral approach taken by certain spread-arb CTAs. The primary difference being Virtu doesn’t hold positions for directional profit. What they do, much like a short term trend follower, is take a position and then immediately lay off risk in a hedge. For instance, they may buy oil and then immediately hedge that position in another market and perhaps even using a derivatives product with different product specifications. In the olden days one could simply describe this as a “market making” strategy, but in the new school world of high frequency trading, separating two-sided liquidity providers from directional trend followers has oddly become more difficult.

99.999 percent daily win percentage overshadows 49 percent intra-day win percentage, highlighting the importance of win size

When comparing Virtu to known managed futures strategies, the 99.999 win percentage sticks out like a sore thumb – until you read the next punch line in the most recent S-1. That is when the firm reveals that its win percentage on an intra-day basis is 49 percent.

This puts the pieces of the puzzle together. The 99.999 percent win percentage needs to be considered in light of the 49 percent intra-day win percentage. This highlights the fact that Virtu, by logical default, is benefiting from size of win. Just like a trend follower, it isn’t always win percentage that matters most but size of win and controlling loss. This is likely the secret sauce inside Virtu’s success.

This article originally appeared on Virtual Walk and was authored by Mark Melin.

My small role fighting a forex fraud

April 6, 2015 by Shaun Overton 13 Comments

I got a call from the FBI in September of last year. Even when you’re completely innocent, let me tell you, it’s never a nice feeling when the FBI calls and asks for you by name.

The agent called to inquire about Kevin G White, a person with whom I’m more familiar than I care to be. The guy racked up almost 120 hours in custom programming and analysis. When I presented him with the $10,000+ bill after roughly four months of work, he ignored me for 6 weeks. When White finally responded, it was through a lawyer. He threatened to sue me unless I lowered the bill to $2,500. Sue me for what!?!

That was the last I heard of him until nearly a year later when the CFTC issued an emergency order freezing the assets of White and his Revelation Forex Fund. It turns out that White’s entire operation was a fraud. The agent called to inquire about the software White ordered and my thoughts on his strategy.

What is a forex fraudster like?

My impression of financial fraud is some slick talking salesman promising extravagant returns through a convoluted investment scheme too complicated to understand. Now that I’ve actually met someone trying to run a fraud, my impression is different.

I think Kevin really did set out to build a currency fund, it’s just that he was too dumb and ignorant to pull it off. The guy barely understood what a pip was, but he seemed to truly believe it was easy to earn millions of dollars. “Can’t the computer just crunch some numbers and come up with a good strategy?”

He really thought that the computer should be able to take a moving average cross and turn it into a money machine.

The “fund” certainly had the pizzazz to look successful. It was right across the street from FXCM’s Plano office in a high rise with marble and granite everything. The front desk was intimidating and CNBC was running constantly. The only thing that truly struck me as odd were the lack of employees. Not even a secretary manned the front desk.

Kevin explained how he needed an automated strategy to take over for his trader in case anything ever happened to him. I remember our conversations about the amount of effort that goes into a strategy and thinking that this guy was not very bright.

Eager? Yes. But that was about it. Aren’t con artists supposed to be slick talkers that convince you how smart and clever they are?

A FOIA on myself

On a whim about six months ago, I decided to file a Freedom of Information Act (FOIA) request with the FBI to see if anything interesting popped up. Only two weeks a cd arrived in the mail containing files on the White investigation. Juicy stuff!

The file, which you can read by clicking here, confirmed what I had already read in the news. Nonetheless, it was nice to see that my emails and conversation with the agent played a role in putting this guy in prison. That’s something that I feel good about.

Today is April 6. I held off on publishing this because the timing of FOIA cd’s arrival couldn’t be any better. A few searches on Kevin White showed that after receiving his 97 month prision sentence in February, he didn’t have to report to prison until… April 6! This post is to celebrate Kevin’s new home for the next 8 years.

Click here to read the full criminal complaint.

Jim Rogers: A Trading Success Story

March 15, 2015 by Kalen Smith 7 Comments

Eugene Fama and other renowned economists have long argued that neither individual nor professional traders can consistently beat the market. However, there are a few legendary traders that prove that beating the market is indeed possible. Many analysts might attribute their success to highly sophisticated trading strategies or divine intervention, but their method to their success is usually much more mundane.

We recently had the privilege of interviewing Jim Rogers, one of the most successful traders over the past century. Both amateur and seasoned traders can learn a lot from Rogers as they create their own trading strategies. Rogers states that traders can beat the market by specializing in trading securities in industries or asset classes where they are experts. If you aren’t familiar with Rogers, we have provided a brief background on him, so that you can better appreciate the feedback he offers.

Jim Rogers is a Trading Success Story

Rogers is widely regarded as one of the greatest traders of the 20^th Century. He began his career on Wall Street shortly after graduating from Yale. However, Rogers quickly realized that working for an investment bank wasn’t the path to true financial freedom, so after three years of working at Arnhold and S. Bleichroder, he and Soros left to start the Quantum Fund.

In 1977, Rogers became a millionaire at the age of 35. Four years after making his first million, Institutional Trader magazine called Rogers “the world’s greatest money manager.”

Rogers success can largely attributed to his unique strategy of focusing on placing highly leveraged trades based around global macroeconomic events. While critics find some of his investing practices controversial, Rogers is also recognized as a trading success story.

Rogers’s Advice for Aspiring Traders

Rogers is unquestionably one of the greatest traders in the world. However, he consistently warns other traders not to follow his advice. He states that traders should find a system that works for themselves rather than following the same roadmap of any other traders, including him.

However, Rogers has provided some great lessons that every trader can benefit from. Here are some of his tips that both amateur and professional traders should follow.

Buy Low and Sell High

Even the most inexperienced traders understand that they should buy low and sell high. Unfortunately, cognitive dissonance typically prevents traders from following this seemingly basic and crucial principle.

One of the biggest reasons that traders fail to buy low and sell high is that they can’t gauge the direction of a stock or commodity price. Rogers said that traders need to identify extremely cheap assets and learn to tell when the prices are going to increase.

This is one of the reasons that he is currently avoiding U.S. stocks. Last month, he wrote on his blog that the U.S. stock market is higher than any year since 1929, which means that there are few opportunities for traders to make a return. In fact, he has predicted that a major stock crash will occur in the near future, which will force the Federal Reserve to inject money to stimulate it.

Rogers recognizes that undervalued markets offer many more opportunities. He is currently investing in the Japanese and Chinese stock markets, because they are currently 60% below their all-time highs.

Invest in What You Know

Whenever people ask Rogers’s for investing advice, he tells people to invest in what they know. Everybody has a wealth of knowledge about something, so they should buy in industries where they can understand trends better than the average trader.

“If you are keen on cars, read everything you can about the automobile industry,” Rogers says. “You will know when something is about to happen that constitutes a major, positive change.”

Here are a couple of ways that Rogers has put this idea into practice:

Rogers invests heavily in the energy sector. He has a professional background in the sector and founded The Rogers Global Resources Equity Index, so his expertise has enabled him to forecast trends in the industry before other traders, which allowed him to beat the market. This is consistent with his belief that people should invest in what they are experts in.
He invests a lot of money in Asian markets. Since Rogers lives in the Philippines and has visited Russia, his firsthand experience with these economies gives him a large advantage over other traders. He once made a fortune shorting the Russian ruble, but recently said that he is considering buying the currency, because he believes that President Putin is taking the country in the right direction. His unparalleled knowledge of Russia clearly gives him a different perception of the country’s economy than other traders.

Everyone is an expert at something, so Rogers argues that they should use their special knowledge and skills to gain an edge in the markets.

Understand How Markets Work

Rogers said that markets often behave irrationally longer than traders remain solvent. Traders must learn to discern real world market behavior from the trends they expect the market to follow. You may be able to successfully predict the direct of the market, but you will still lose money if you can’t ride the market out until it is time to close your positions.

Rogers learned this the hard way when he first began trading and tried short-selling six companies. Rogers accurately predicted that these companies would eventually go bankrupt, but they rose in value for several years before that. While his prediction was right, Rogers got wiped out when the value of these companies rose and his broker made a margin call.

In a discussion with Hard Asset Trader, Rogers said that he still feels he isn’t good at market timing. However, he has learned the importance of keeping maintaining enough capital to wait out the markets until it is time to close his positions.

The most important thing is to avoid being overleveraged. Rogers said that markets do stupid things, so you will need to have enough of a reserve to make sure that you can wait out those periods.

How do traders know if they are overleveraged? Traders themselves are their own best barometer of that. Rogers said that traders that spend the entire day following changes in the market instinctively know that their margin is too high. These traders are highly anxious, because a small shift in the wrong direction can wipe them out.

He started stating that traders were overleveraged several years before the financial collapse, but few traders heeded his warnings. Rogers actually began shorting U.S. equities and debt in 2006, because he recognized that the Federal Reserve policies had created a financial bubble that would burst within the next few years. He continues to urge other traders to avoid repeating these mistakes to avoid facing similar financial catastrophes.

Rogers states that traders need to thoroughly understand market behavior and the impact of Federal Reserve policies before playing in the markets.

Spend Less Time Investing

Paradoxically, Rogers claims that the best way to be a better trader is to typically spend less time investing. “”Most successful traders, in fact, do nothing most of the time,” he states.

The biggest mistake is that many traders become cocky after they make a lot of money. They may become overly convinced of their abilities, which can lead to them making some very poorly informed decisions.

Rogers feedback comes from personal experience. Around the time he started trading, he tripled his money in three months. He then got careless and was wiped out in two months after trying to short sell after a market rally.

Rogers told us that Hubris led to him making very bad decisions, so other traders shouldn’t do anything unless they are absolutely sure that they are making the right move.

Shun Diversification

Most stock brokers focus heavily on diversification. Major brokerage firms such as Fidelity and Vanguard focus on top-down hierarchal approaches to investing. However, Rogers argues that diversification is a bad practice for growth traders.

“If you want to make a lot of money, resist diversification. Brokers promote the motion that everybody should diversify. But that is mainly to protect themselves. The way to get rich is to find what is good, focus on it, and concentrate your resources there. But make very sure you are right,” he states.

Rogers attributes his track record to his ability to understand some markets and industries very well and focusing on them exclusively. He encourages other traders to follow similar practices.

Traders Should Find Any Strategy that Works

On the surface, most of the advice Rogers has shared may seem very simplistic. However, it is also worth its weight in gold for all traders.

The biggest takeaway from our interview with this legendary investing guru is that there isn’t a single path to success. He said that traders will need to follow the strategies that work best for them. For example, while Rogers doesn’t have any experience with algorithmic trading, he said that traders that have a knack for it should absolutely use it if it works for them. If they wish to become a trading success story themselves, they should be confident in their own strategy rather than listening to tips from their broker or other financial professionals.

Who is Jim Rogers?

Jim Rogers is a lifelong entrepreneur and trader. He founded his first business at the age of five selling peanuts. In 1973, he partnered with George Soros to found the Quantum Fund, which has become one of the most successful hedge funds in the world.

Rogers has justly earned a reputation as an investing genius. Between 1973 and 1983, the value of the Quantum Fund increased 4,200%, a return nearly 100 times larger than the S&P. The fund returned 3,500% by the time that he retired.

What is your favorite part of Jim Rogers’ story? Share your thoughts below