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    The Profitable Art and Science of Vibratrading: Non-Directional Vibrational Trading Methodologies for Consistent Profits
    The Profitable Art and Science of Vibratrading: Non-Directional Vibrational Trading Methodologies for Consistent Profits
    The Profitable Art and Science of Vibratrading: Non-Directional Vibrational Trading Methodologies for Consistent Profits
    Ebook356 pages2 hours

    The Profitable Art and Science of Vibratrading: Non-Directional Vibrational Trading Methodologies for Consistent Profits

    By Mark Andrew Lim

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    About this ebook

    Enter the world of vibration trading with a new methodology for making more money, more safely

    What if you could enter the markets and know, in advance, the exact value of trades needed to sustain a losing streak, by knowing their Martingale limits, to finally ensure a win? With Vibratrading you can. Applying the principles of "Boundedness" in conjunction with powerful stock/ETF diversification techniques, Vibratrading™ allows you to accomplish what most traders and investors previously thought impossible, giving you an unfair advantage in any market situation.

    A new and revolutionary perspective on trading and investing, Vibratrading provides a powerful methodology for extracting profit. Non-directional, it is designed to appeal greatly to the vast number of directional traders consistently struggling to keep from losing their trading accounts. Providing a better, safer way to participate in the markets to make consistent profits, it is the only book you need to gain a crucial competitive edge.

    • Presents a radical new trading strategy, Vibratrading™, that the market cannot move adversely against
    • Demonstrates how a scale trader can enter the market at any level, without being restricted to entry at the "conventional lower end" of the instrument's historical range
    • Teaches traders and investors the important techniques of securitizing and monetizing profits with emphasis on risk free vibrational share accumulation

    Presenting a truly non-directional methodology, Vibratrading is the book you need to make more money, more safely.

    LanguageEnglish
    PublisherWiley
    Release dateAug 17, 2011
    ISBN9780470828779
    The Profitable Art and Science of Vibratrading: Non-Directional Vibrational Trading Methodologies for Consistent Profits

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      Book preview

      The Profitable Art and Science of Vibratrading - Mark Andrew Lim

      Acknowledgments

      I would like to convey my heartfelt gratitude and appreciation to my parents for their constant inspiration and guidance, and to my sister, Stella, for her tireless support and assistance. I also extend my sincere thankfulness to all my friends including Radge, Matilda, and K.S. Hee for their unconditional support and friendship throughout the years. I thank Nick Wallwork, Joel Balbin, Jules Yap and everyone at John Wiley for the opportunity to share Vibratrading. I am ever grateful to Laura Paquette for her phenomenal contribution and expertise in helping me put this book together. Finally, I truly thank all my graduates for their amazing participation, insight, patience and dedication, without which this book would not be possible. In many ways, I am your student.

      The deeper the vibration, the greater the creation.

      Introduction

      One of the key aspects of trading (and the most frustrating) is that it's impossible to predict the future. Since no trader can possess any absolute knowledge as to the future direction of price, one obvious option is to employ a Martingale strategy which keeps you increasing your bets until you eventually win. Unfortunately, since we don't know exactly how long any particular losing streak will last, and since most of us lack unlimited funds, this strategy is destined to fail, resulting in the total loss of our capital.

      If we could work out exactly when that streak would end, of course, we would never lose, because we would know well in advance the precise amount of funds required to survive the streak and eventually produce a win, or a gain in capital. Even though the risk to reward ratio may be extremely low, especially on the very last bet, the trader would still come out on top.

      Imagine if traders could enter the financial markets knowing exactly where the Martingale limits reside. Even if the price remains below the traders' entry level indefinitely, they would have the ability to coast through the losing streak to success.

      I have adapted the high-risk and high-investment method of scale-trading to a safer, more powerful and adaptive tool: Vibratrading. Vibratrading is based on generating returns in the market from price oscillations, or vibrations. It is also implemented with reference to the concept of boundedness, which helps the trader or investor understand the type and degree of risk associated with any particular trading technique or mechanism. Trading according to the rules of boundedness is what separates vibratrading from conventional scale trading. Boundedness is all about capital preservation, which includes the strict avoidance of all capital depleting mechanisms like stop losses, long options or initiating net short positions. More specifically, boundedness is defined as the condition in which the final account equity will be equal to or greater than the initial account equity, should price retest the initial price entry level. For example, a vibratrader enters the market at a certain price. After a number of trades, the market returns to the initial price level. If the methodology caused equity to fall below its initial value, then that methodology is said to be unbounded. All trading strategies and mechanisms are categorized as either bounded or unbounded. The vibratrader has a choice to implement either trading mechanism within the vibrational construct, but this must be done with full understanding of the risks involved in choosing an unbounded methodology. These strategies can be used in conjunction with various diversification techniques to accomplish what most traders and investors previously thought impossible.

      The Genesis of Vibratrading

      Before I get into the methodology behind vibratrading, let me explain the thought process leading me to this point.

      It all started with a simple question:

      What if we could find a stock or instrument that would never collapse to zero, except in a total systemic meltdown of the financial market?

      If we could construct or find such a fail-safe investment, then we would only need to preserve our invested or traded capital in the market long enough to either:

      1. experience a favorable upside move, or

      2. accrue enough returns to reduce our overall cost basis.

      To eventually profit and avoid capital erosion, we must stick to methods which build capital and avoid all capital depleting activities and mechanisms. Of these mechanisms, one is the most detrimental. To keep our capital intact, we must avoid using the single most capital-depleting mechanism ever created, ironically called the stop loss. When investors have a working order to sell at a certain price, regardless of circumstances, they may protect themselves from loss but also risk gradual depletion of capital funds. If the position is repeatedly stopped out, the account equity will inevitably be wiped out.

      If we avoid the deployment of all stop loss mechanisms in our trading and investing activities, we will need sufficient capital to sustain a fall in price down to zero for longs (investments made with the hope of prices going up). At the same time, we need enough capital to hold the shorts: stocks sold with the hope that the price will go down, thus allowing us to repurchase and make a profit. Since there is no upper boundary to price, we would need essentially unlimited capital to hold short losses, therefore the only feasible solution is to initiate and hold longs. As the maximum that we can lose is the amount that we paid for shares, the limited risk involved is capped.

      Accordingly, we should only go long for vibratrading to work. In other words, traders must buy low and sell higher, and never sell high with the intention of buying back lower. As shown above, shorting would expose the trader to unlimited upside losses, especially without the protection of a stop loss mechanism. To protect the capital from depleting permanently over time, that is, to ensure that trading capital is always bounded, all trades must close in profit, as opposed to a loss. Wouldn't that mean that all long exits would be profitable? Well, upon deep reflection, yes!

      On the other hand, this does not mean we should keep buying as prices rise. There is no upside limit to price and therefore we would need unlimited capital to keep on buying as the price rises. Some think we could always just buy on profit. That is one option, but we need to be prepared should price decline prior to the opportunity to buy on profit. Remember, we cannot use a stop loss. If all capital has already been allocated to that one long position, then there is little recourse except to hold that position until price returns to the original entry level. If this should happen to a contract for difference (CFD) trader without the capital to sustain the long position all the way down, then positions could be liquidated for violating the minimum margin percentage level.

      So does this mean we should keep buying as price falls? Realistically we could, provided we have enough funds to support our downside buying expedition. By buying more at a lower price, we are averaging down and reducing the average cost per unit of the investment. The difference when averaging down with longs, as opposed to averaging up with shorts, is you at least have an idea of the maximum capital you need to maintain your long positions down to zero, or what I call Zero Test Point. There is no equivalent cap when averaging up with shorts. Therefore, if you plan well in advance, the idea of averaging down is totally workable.

      So far, it looks like even if we avoid all capital depleting mechanisms, we may still be holding on to non-performing long positions. However, what if price continues to oscillate at the bottom of the market? In that case, we could continue buying low and selling higher every time price vibrates, and in the process extract profit with every vibration. That would mean that we could continue to generate returns indefinitely. Of course there must be a loophole somewhere; for example, what if the shares of the stock plummet to near zero?

      Actually, our oscillation profits will be high in that situation, as we can buy and sell even more shares due to the lower price. We would, in fact, make greater vibrational returns at lower share prices. We take advantage of this price leveraging effect.

      If the stock plummets directly to zero and winds up, however, there is no way to profit—unless there is virtually no possibility of the stock or instrument ever testing zero. Fortunately, there are three main categories of instruments that never reach zero (except under exceptionally adverse market conditions).

      The first is called an Exchange Traded Fund or ETF. An ETF is a stock with a share price based on a basket of component stocks. ETFs have a built-in replacement mechanism that automatically replaces any stock that is failing to meet the fund's criteria for inclusion within its large basket of component stocks. As such, the share price of an equity-based ETF can only hit rock bottom if every stock in the basket plummets and collapses to zero simultaneously. That scenario is incredibly improbable—it would be financial Armageddon!

      The second category is Index Future Contracts, which involve an agreement to sell at a certain price at an agreed future date. As with ETFs, index future contracts are based on a basket of component stocks and as such will never test zero except in exceptionally adverse markets. Index investors receive a separate return, the roll yield, when they roll trades over periodically. That return is negative when far out futures prices are higher, or in contango. Unfortunately, we cannot employ index future contracts in vibratrading due to the effects of negative roll yield.

      The final category is commodities. It is virtually impossible for a commodity that is not financial-based to hit zero test point. When was the last time we saw precious and base metals, oil, wheat, corn, or sugar at rock bottom? Never! But we can only vibratrade the spot prices of these commodities via CFD platforms. We cannot use futures contracts to gain exposure to these commodities, due to the negative roll yield mentioned above. We also cannot use long options to trade or invest in these markets; it could expose the trading account to capital unboundedness. As a result, we will only focus on ETFs and CFDs in vibratrading. As a rule, we do not vibratrade single stocks as there is no mechanism to prevent them from winding up. But I will introduce a vibrational technique called Oscillatory Propagation should a stubborn vibratrader insist on trading single stocks.

      Okay, things are starting to look much better. But if the price of the equity-based ETF stock just stays completely still and flatlines, it appears there is no way to profit within the system. In reality, all we have to do is incorporate options into our vibrational construct to generate profit. We never buy options, as they deplete capital if you fail to achieve at least a breakeven trade. This was the very reason we avoided using stop losses. In flatlining markets, we sell options instead.

      Yes, we all have heard of traders and investors losing the shirts off their backs from trading short options. But, if we deploy short options within an oscillatory or vibrational trading construct, then those positions will be completely riskless, unless the price of the stock or instrument falls to zero. The remainder of this book will show you how to maintain short options without risk, while your predetermined working capital continues to generate returns indefinitely.

      I will start by teaching you some of the basic knowledge required to fully grasp vibrational trading systems. You will then learn to set up, construct, and implement some of the most effective bounded and unbounded trading methodologies for generating consistent (as well as exponential) returns in the markets. You will also learn to never fear falling markets again, and in fact, to look forward to such bear action! Buy and hold is comparably inefficient as vibratraders continue to generate returns instead of passively hoping for price to return to previous levels. Eventually, we will see many examples of bounded and unbounded vibrational constructs for generating consistent income in all manner of markets, taking conventional scale-trading and averaging strategies to the next level.

      Layout

      This section describes the basic layout of the book on a chapter by chapter basis. Readers are advised to start from the beginning, going through all the chapters sequentially. Various terms, concepts, and techniques will be introduced systematically.

      Chapter 1 briefly describes the nature of vibrational strategies and techniques for extracting profits from the markets. It discusses the difference between directional and vibrational trading. There is also a brief explanation of the concept of boundedness.

      Chapter 2 covers the basics of order entry with a look at the various characteristics and functionality of trade orders. Special emphasis is placed on those orders that are used in vibrational trading. Besides covering some terminology and trading definitions, this chapter also delves into the various price- and time-triggered orders and includes a very useful graphical representation for easy referencing.

      Chapter 3 reveals the objectives of vibratrading, including employing it as an income strategy. This is followed by a basic introduction to the concepts and definitions applicable to vibrational trading.

      Chapter 4 goes over the control of risk in vibratrading, covering the various types of risk and its control mechanisms, as well as topics on diversification, hedging, long options, and the important Disposable Capital Rule.

      Chapter 5 introduces the mechanics of equity price action which represent the nuts and bolts required to fully comprehend the various scaling constructs introduced in later chapters. It explains how to calculate simple profit and loss, market value of total investments, and various leverage factors. Important concepts like price, buy, and money leverage ratio are of particular relevance with regard to the selection process of a suitable ETF or CFD, as well as the vibrational construct desired.

      Chapter 6 includes the analysis of price action itself, with regard to single and multiple hedged and unhedged positions, with simple calculations of hedged or soft-locked profit and losses. The concept of average price, break-even point, and net position is thoroughly treated. The implications of negative spread bias are also highlighted.

      Chapter 7 presents the mechanics and dynamical aspects of boundedness, a unique concept that gives rise to the rules of vibrational trading. Boundedness originates from the important role of capital preservation in trading and investing, and includes three aspects: Range, Directional and Order Entry. Boundedness not only dictates how the scaling mechanism and constructs should work, but also indicates which trading strategies and techniques are bounded or unbounded.

      Chapter 8 is critical as it explains the construction of all the scaling mechanisms of the vibrational methodology. It starts by describing the general properties of the pyramidal vibrational structure with references to scaling factor, foundational stability, conversions, and the Buy-Sell mechanism. All this is followed by a detailed description of the main scaling mechanisms used in vibratrading.

      Chapter 9 explains the mechanisms and methodologies under the Pyramidal Based structure and vibrational elements like termination and share multiples, along with its constructs: the Null, Profit, and Phi-Based constructs. Vibrational hedging follows with illustrations of the numerous forms of hedging for long and short vibrational returns, with special focus on the Short Scaler and Rider techniques.

      Chapter 10 describes in detail the diversification strategies and levels used in vibrational trading. In fact, these levels of diversification lay the foundation for a virtually indestructible portfolio by overcoming the effects of both systematic and specific risk. The idea of the pyramidal floor is examined, followed by an illustration of the vibrational constructs. Diversification is treated in detail with reference to its six levels. Particular attention is paid to the fifth level of diversification: Oscillatory Propagation. Finally, the difference between market-driven and structurally-driven correlation is presented along with various charts depicting its behavior.

      Chapter 11 explains the difference between timing the market for direction and timing for volatility. A range of volatility techniques are described specifically for use within the vibrational constructs for added profit potential, which includes event trading, range zoning, and effective range scaling.

      Chapter 12 represents the culmination of all vibratory and trend capture techniques. The reader is taken through the practical steps of selecting and putting together bounded and unbounded vibrational, bidirectional, and directional constructs. It also covers cost reduction techniques. A thorough analysis of the operational and functional characteristics of the vibrational grids is carried out. The bounded and unbounded trend capture constructs are then introduced, with examples using CFD traded commodities. Numerous other vibrational techniques like Macrosiso Vibrahedging, Martingaling, and Zero Cost Hedging are then introduced. Finally the vibratrader is shown how to generate consistent returns via the use of the average period range.

      Chapter 13 explains the many aspects and characteristics of ETF behavior, with emphasis on its inherent risks, advantages, diversification, and leveraging. There are numerous examples with charts showing the differences between market- and structurally-driven correlation. Sector rotation and basic intermarket analysis is covered. Non-linear performing ETFs and ETNs are examined along with asymmetric leverage, negative expectancy, and the daily reset feature. The fifth level diversification strategy is also discussed within the context of the replicated and hybrid portfolio.

      In Chapter 14, vibratrading is compared and contrasted with some of the more popular trading and investing systems, highlighting its overall efficiency. This section examines how vibratrading overcomes many common shortcomings, and will be of particular interest to those who are currently trading and investing with these popular systems. Vibratrading presents various ways to augment and improve such systems with a view to minimize risk and maximize profitability.

      In Chapter 15, some simple options techniques are introduced to supercharge the vibrational constructs

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