QE2 Blues

This ain’t me.

I have been professionally trading the financials [gold, silver, currencies, bonds, S&P] for just a little over 30 years. I have never seen volatility across the board like we have seen in the last 2, maybe 3 weeks. Today was just over-the-top crazy.

Gold has a $25 range before Europe even opens. In the last few days, silver has ranges of $2. EURUSD is all over the place with ranges of 200 + pips the norm.

Today, AUDUSD [in my algorithm] violated the lower aqua line twice [RM=3], rallied to the upper aqua line, and then went down to the lower aqua line again. Prices are moving so fast, that entering a trade with an acceptable risk/reward ratio is almost impossible. What I mean by this is that the algorithm triggers a buy/sell signal and the market is anywhere from 20 to 40 pips away from the signal. By the time I enter a stop, I’m looking at 60 pip risk on a single trade. This is simply not acceptable.

As I have stated before on the fxfisherman forums, precious metals present their own problems when you have free-falling prices. No markets are worse for stops than silver and gold. What you think is an acceptable risk becomes moot after potential stop slippage.

As a result, I stepped away from trading today as I have done other days this month. If you have read any of my posts, blogs, and algorithm documents you know I take risk seriously. Now you know why. There is a reason why I’m a 30 year veteran of these markets; there is a reason why I have been rated #1 in the world in managed funds [download “Vegas #1” above]; it’s not because I’m the smartest guy in the room or because I get lucky trading, but because I treat potential risk very, very seriously and I am very disciplined.

Don’t get me wrong, I love volatility. But not volatility induced by panic reactions from government bureaucrats who are trying to manipulate the world’s financial system. This whole G-20, PIIGS, Weimar-Fed-QE2 thing is the biggest Ponzi scheme in the history of the world. It is a CERTAINTY that it will fail and fail miserably. Because we have never seen anything as brazen as this scam, markets are reacting accordingly. I certainly will adjust my trading.

I can easily recover losses of a percent or two within a day; recovering from 30% or greater hits from very chaotic trading is very difficult. It has nothing to do with being a hero or being a big shot. I have a moral responsibility as author of the algorithm and being a money manager, to give to you my honest, up-front expertise. I hope you would expect nothing less.

I have been there. On a Friday afternoon in October 1980, I lost 70% of my account in 45 minutes trading gold. Things got away from me in a highly volatile market! I put the circumstances of this situation in the “1 Hour Tunnel Method” I released a few years ago.

I have absolutely no intention of ever getting anywhere close to that again. Whether I manage your funds, you trade the algorithm on your own or it simply is my own account, I know the feeling of large losses and I simply refuse to participate.

I know that by publishing my trading methods, and now managing a PAMM, I open myself to all kinds of criticisms. “A wild day and you sit on the sidelines? Are you some kind of pansy? Where are your balls? C’mon, do somethin’!!”  I’ve heard it all before and worse. If you read the PDF file “Vegas in the Pit” [download above], you will know that there was a time when I refused to participate in a rally that lasted 23 days in a row before disaster struck. Who was smiling and said “I told you so” at the end?

The money comes at its own pace; I simply don't want it to go away from circumstances beyond my control.

The point I’m trying to drive home to you all is to take risk seriously. Consider risk before profit blinds you. One, two, or even 23 days mean nothing; large percentage losses destroy your financial future. How many times have I told you that before you pick the color of your new Mercedes, first do no harm, and then make the money.

***

I make no bones about the fact that I am bullish on gold and silver. However, as I have told you many times, do NOT fade the algorithm. At the start of the Asian session I was waiting for gold to turn to get long: errrrrrrrrr, it didn’t happen. Instead, we got a $20 drop in about 3 hours. Now, the probability of coming back from this drubbing and then making new highs is not good. If it happens, then fine, I’m long; but it is a serious warning flag going forward that moving higher today will be very difficult. This drop convinced me not to be long, but the 4 Hour is still bullish, so I don’t want to get short either.

AUDUSD turned bearish on the 4 Hour chart Thursday, and after watching it get pummeled to the lower aqua line twice, my gold proxy for buying and selling didn’t look good either.

Then comes news that Italy had a good [so the apparatchiks say] government bond auction and everything goes nuts in a wild short covering rally. Whoops – sorry to screw you – time to head lower to the aqua line again [maybe it wasn’t so good after all]. This isn’t the kind of trading action I want to participate.

In the late 1970’s, Clint Eastwood immortalized the character “Dirty Harry” in a series of cop movies designed to show how corrupt and inefficient American cities had become regarding law enforcement. From a list of my favorite Dirty Harry quotes is “a man has got to know his limitations”.

Well, I know mine and I know when to step away. It’s ALL about the money.

-vegas