Friday, 18 March 2011

Markets can stay "irrational"...

Yes, markets can stay "irrational" a lot longer than I could stay solvent. Yesterday I shorted the ES into the Gap trade well before RTH. It just looked too expensive in the light of the news coming out. Loss of discipline, trying to trade on "fundamentals" rather than what I am seeing in the order flow. I had to double down to get out of it. Happily, sanity returned quite quickly and I ended up making a tick. That was luck and counting on luck to make trading profits is an easy way to make a small fortune out of a big one.

It's almost 5am in London when I'm writing this part of the blog. Just woke up and can see the ES in orbit again. There was intervention overnight by the BOJ and the Nikkei is up 2.69% at this moment. I'm not shorting, at least until I see something real in the flow that tells me to. Flo is turned off until her algo wakes her up for the trading sessions that she has backtested to be profitable for her. Flo doesn't know the news and can't see tsunamis or earthquakes or how traders react to them. She does see the footprints of the order flow and walks in them.

People can't understand why the Yen is so strong and there is lots of money being made and lost in the confusion. Trying to sit on the two horses of fundamentals and technicals usually results in falling between them. The position I am putting on is for the next few minutes. Confusing the trend I am trading and a larger fundamental trend would be a big mistake. As I always say, trade the trend of the chart that you are watching - and that should be just one chart.

NB: I have just heard about some great back testing support for MarketDelta from the great people there. You can find it here. We learnt from it, so I highly recommend it. We're working on adding more context sensitive stuff to the Flo algo which can be done using the MD RTL.

I have a nice but small basket of markets I am trading. The star today was the T-Note - ZN on most quote services for the electronic version. I used to trade T-Bonds in the 1980s, but that market has been exceeded in volume by the Notes as mortgages get redeemed much earlier and these markets are used for hedging.

With Flo, I am able to adjust the aggressiveness of my entries and can measure the strength of the trend. Pretty cool. As you can see, I trade all the markets in the same way. All the charts look the same and that's how it should be.

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