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Chapter 1
Challenges to Conventional Trading and Investing
In this opening chapter I will explore some of the common issues faced by conventional traders and we will begin to discover the vibratrading difference and advantage.
Directional vs. Non-Directional Methodology
By far, the most popular trading approach is directional. This requires a trader to make a bet on the future direction of price. We see this approach used heavily in scalping, day, and swing trading, and especially in instruments offering medium to high leverage such as Foreign Exchange (FOREX), commodity futures, CFDs, and options. If price moves favorably, all is well. Problems surface any time price moves adversely, resulting in capital erosion by the amount risked on each trade. Therefore, to avoid blowing out the entire account, a directional trader must ensure that the system is profitable indefinitely, or until the trader decides to cease all trading activities. If a trader fails to maintain this ongoing condition of consistent profitability, all trading will eventually come to an end, without any means of extracting further profits without injecting new capital. Furthermore, once the trading account's drawdown (percentage between the equity peak and the trough during a specific period) is over fifty percent, recovery is extremely difficult. If trading is allowed to continue, it is very likely that all capital will be depleted in the process.
To overcome this, many traders resort to non-directional strategies through which they hope to negate the effects of directional risk by attempting to profit bi-directionally. There are basically two ways that traders can accomplish this feat.
A trader may employ a âstraddle-typeâ breakout strategy. Two stop entry orders (orders to enter the market at a less favorable price) are made in an attempt to encapsulate the market, hoping for a breakout in either direction. Unfortunately, many traders experience very rapid oscillation losses across the straddle zone, especially with false breakouts in a prolonged inactive, or sideways, market. Even if the initial breakout was successful, trying to gauge a suitable exit becomes the new challenge. If the exit is taken too soon, there may be insufficient profit to offset past and future oscillation losses. On the other hand, if there are already some oscillation losses, exiting before breakeven will lock them in. While the straddle breakout may seem to overcome the directional risk issue, it comes at a high cost when the market reverts to sideways or volatile behavior.
Another popular way to eliminate directional risk is to resort to so-called ânon-directionalâ options strategies. The main problem is that those strategies must be directional to some degree, as they require the trader to predict the degree and time of arrival of future price movement or reaction. It still requires price to respond in a particular manner, and accordingly, the trader ends up having to predict the right strategy to use in order to collect positive premium and keep it.
For example, a long straddle option strategy requires price to move at least a certain distance before it is profitable, even though it is already âin the moneyâ (ITM), or worth exercising. The challenge of breaking even is further exacerbated if the long straddle was purchased during a period of high implied volatility, which increases the premium of the long options. Hence you need a certain amount of price excursion to overcome the premiums of the long call and put options in order to profit. If price fails to move, you lose both premiums and experience capital erosion. Conversely, in a non-option-based bidirectional breakout, you would incur no cost whatsoever for unfilled pending stop entry orders on either side of the bidirectional breakout. In the short straddle option strategy, price has to be stationary, or remain within a specific range. If price makes a significant excursion in either direction, the trader will lose and capital will be depleted in the process.
Unlike the conditional terms of straddle options, vibratrading allows the trader to use the very same entry strategy for all price and market outcomes. The vibrational constructs and mechanisms will generate returns in up, down, and sideways markets, including perfectly flatlined markets, via the implementation of riskless short options positions that do not deplete capital.
In other words, vibratraders do not need to predict the future outcome of price or which strategy to use. All vibrational entry mechanisms extract profit, no matter what. This means that if price falls after a long entry, you will still generate vibrational returns, even if price never returns to its original entry level. In fact, you will be exposed to the greatest returns when the market is at its weakest.
On the other hand, should price explode to the upside, the very same scaling mechanism will capture trend profits. More positions will be pyramided in to maximize profit potential once certain conditions are met.
We will learn how to extract more vibrational and trend based returns without added risk or capital.
The reason that these unique vibrational and trend-based mechanisms can capture profit in all markets, regardless of direction, is their ability to adapt to whatever scaling or trending construct is required for that market. This ability to capture bounded returns is only possible if entry was executed at or below the pyramidal apex level. The apex represents the highest point in a pyramidal structure where long entries are still bounded. Entering long positions above the apex leaves insufficient capital to hold these positions down to zero, thereby risking a margin call. This is especially relevant when trading with high leverage. In a âcashâ account, all shares are bought and paid for up front and the concept of an apex is redundant.
Return derived from entries above the apex is unbounded in nature. In fact, every bounded vibrational entry must be at or below the apex level in order to accommodate every possible future price action. This important bounded entry condition will be covered in subsequent chapters.
Problem of Maintaining Long-Term Consistent Positive Expectancy
To be profitable in trading, you will need to use either a Martingale-type system with pre-knowledge of the maximum number of losing trades possible, or an anti-Martingale system. That system only increases successive bets if it is profitable, and in the process must able to maintain a consistently positive trade expectancy or average return. For those unfamiliar with the concept of trade expectancy, it simply refers to the profitability of a series of trades in terms of winning percentage to the average dollar win or loss per trade. Basically, expectancy tells you whether you have been profitable or otherwise, over a number of trades, based on your entry and exit rules.
Every trader knows, or rather should know, that the only factor you can actually control is your dollar win or loss per trade, also referred to as the reward to risk ratio. You have absolute control over your entries and exits, and as such, you have total control over the amount of profit or loss per entry. But you have no control whatsoever over the number of wins or losses. Winning percentage is purely determined by the markets, and you cannot influence the future direction of price. No amount of fundamental, technical, statistical, or behavioral analysis (no matter how advanced or sophisticated) can possibly forecast with perfect accuracy the subsequent direction of price. To make matters worse, expectancy is just thatâit âexpectsâ the win-loss ratio to remain constant. As we well know, that is akin to wishful thinking. The markets are under no obligation to generate a consistent winning percentage for anyone.
This unrealistic attempt to keep a trading system's expectancy positive and consistent indefinitely is one of the biggest challenges in directional trading.
This results in what I call the âExpectancy Boxâ problem. I conduct an entire masterclass in âStochastic Maximizationâ to help traders overcome the issues of extracting profit from randomness. This does not mean that directional trading, which I define as trading with a stop loss mechanism, is bad in any sense. What I am saying is that it is tremendously difficult to maintain consistent profit indefinitely.
Nevertheless, the concept of expectancy remains important to directional traders, despite being highly difficult to sustain, especially in the face of inexplicable market expression. The challenge of maintaining consistent positive expectancy, coupled with the uncertainty of predicting future price direction, is often considered a cause of traders losing their account completely, which happens more often than we'd like to believe. In vibratrading, we do not need to predict price action at all; it can only add to the effectiveness of the methodology.
Even gamblers can be profitable over the very short term. Though the application of money management plays a pivotal role in the final determination of trading expectancy, the actual task of producing net profits is still formidable, if not near impossible, for most retail traders and average investors. Profitability under the vibratrading methodology does not depend on the win-loss ratioâsince every trade only closes in profit there is no win-loss ratio. Therefore, vibratrading, be it bounded or otherwise, totally circumvents the sheer difficulty of maintaining a consistent positive expectancy in the long term. The concept of winning percentage and reward to risk ratio is not applicable.
Predictive vs. Reactive Approaches to Risk in Trading
Another issue that plagues traders is the use of price prediction as part of a trading strategy. It is universally accepted that price and market action are random or at best, semi-random in nature. You cannot access all relevant trade information instantaneously to assess the actual forces of supply and demand. Even if you could, you would still require information as to the possible future actions of all market participants in order to anticipate the supply and demand at approaching price levels. You would also need to be able to anticipate unexpected market âshocks,â or catalyzing events, including the range of possible reactions of all participants. Not only do you need to know of any possible current or future events, you also need to consider the tenuous intermarket interactions that may affect your trades or investments. As you can see, maintaining a reasonable and consistent winning percentage while maximizing the reward to risk ratio is going to be a never-ending challenge to the directional, predictive trader.
The reactive trader faces similar challenges, the difference being the reactive trader only initiates a trade entry after price has confirmed a breakout, pullback (a rising of price from its bottom), or throwback (a falling of price from its peak). For example, a reactive trader would enter a pullback from a support level via a buy stop entry order, after price has confirmed the pullback, whereas the predictive trader would enter at the same support via a buy limit entry order, before any proof of a pullback is evident. Reactive traders may also try to predict future price direction, but they will only initiate a position once price has confirmed a favorable move that was predicted by the analysis. Therefore the reactive trader is consistently late in initiating entries, whereas the predictive trader enters a position in anticipation of its outcome. In terms of risk profiling, the predictive trader may be âaggressive in timeâ but âconservative in price,â whereas the reactive trader is âaggressive in priceâ but âconservative in time.â This is the dualistic nature of trader risk profiling. âAggressive in timeâ means to initiate a position before price confirms a favorable or desired move, whereas âconservative in timeâ means to initiate a position after that has occurred. Someone who is aggressive in price will initiate a position at a less favorable price level; conservatives in price initiate a position at the most advantageous price level.
As mentioned, the concept of risk and reward is not at all applicable to vibratrading. The basic idea of return on investment (ROI) applies, but the returns are also defined over time, in addition to a fixed initial invested value.
Also, the relationship of time and risk in vibratrading totally contrasts with traditional directional trading. Generally, the more time you spend in the markets, the lower your chances of achieving consistent profitability. But in vibratrading, the more time spent in the market, the less the risk. This is because the investment's cost basis is constantly being reduced via vibrational returns. Therefore it is advantageous to remain in the market as long as possible, preferably indefinitely.
Trader Inactivity and Volatile Price Activity
In most directional trading approaches, a system will suffer losses in the form of slippage when a trade entry or exit is executed at a price that is different from the expected price. These losses only occur with stop orders. Orders being filled at an unexpected price above a buy stop will result in additional losses, called negative slippage. Negative slippage results in reduced profits for those entering long positions and affects sell stop orders. Either way, stop entry or exit orders may have a negative effect on trades. In an unbounded vibrational construct, the vibratrader may employ long and short stop orders for entry and exit, be it pending or instantaneous.
But with limit orders, slippage can only have a positive effect. Being filled at a price below a buy limit order may result in additional âpotentialâ profit for those entering long positions, while ensuring additional real profit for those exiting short trades. In other words, limit orders may experience positive slippage, but never negative slippage.
So, in bounded vibratrading, only limit orders are used. The principle of boundedness forbids the use of stop entry or exit orders in order to prevent negative slippage and, ultimately, capital depletion. This means that, if boundedness is to be maintained, all entries and exits should be executed strictly via buy and sell limit orders respectively. In unbounded vibratrading, we employ stop orders, but we must understand and accept the risk of capital erosion that may arise from negative slippage and price gapping in a volatile market. In bounded vibratrading, we welcome market volatility because trading with limit orders will only result in positive slippage, greater profits, or more advantageous entries and exits.
Should a vibrational trader experience price gapping over any limit orders placed for exiting a position, the trader will experience additional profit. On the other hand, should that trader experience price gapping over any limit orders placed for entry into a position, the trader may experience additional âpotentialâ profits upon a favorable exit, since the trader has entered at a much lower entry price for longs. This represents a real trading and investing advantage, or edge.
Hence, all price or market volatility, whether the result of some economic release like earnings or a major broad market or inflation report, will always be advantageous for bounded vibratraders. They either exit with added profit in their long positions, or enter into positions with a favorably lower buy price. It's a win-win situation.
Finally, with limit orders, there is no missed opportunity. A vibrational trader can profit from ...
