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Trading the 6E Old School, With a Twist
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Trading the 6E Old School, With a Twist

  #51 (permalink)
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This thread is going to the dogs






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There's no School like the Old School

More about the VWAP


Most of today's markets never sleep, the 6E is no exception. The information, price and order flow from around the globe is seamless and instantaneous. At anytime from anywhere in the world when traders bring up a 6E chart we all see the exact same last traded price within a fraction of a second. Knowing this is true, I also believe the last calculation of the Volume Weighted Average Price is considered the benchmark value of the 6E worldwide. I'm not alone in this belief. Algorithmic trading in the FX market is becoming more and more popular, many of the old standby algos are based on the VWAP and it's standard deviations. Although this first graph obviously encompasses stock trading the sheer number of traders still using the VWAP is, IMO, worth noting.

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EBS, Electronic Broking Systems



So what does all this mean, if anything? I believe it signals to those who are looking, watching, studying or measuring that the 6E stays in a continuous state of evolution and market dynamics are constantly changing. This evolution of the currency's characteristics are IMO the forces wreaking havoc on many sound trading methods. I have studied the VWAP and its bands for many years, I know these levels can often stimulate volume and are significant levels to be aware of intraday. I've used the VWAP and the bands as a reference point for many of my studies and I've had limited success compiling a few tradable intraday signals based on them alone. However, when the VWAP and its standard deviation bands are used in conjunction with other studies, like those described in previous posts successful trades can be increased greatly.

The VWAP is probably one of the most common tools retail traders have that allows them to peek inside and witness algo-trading order-flow. I have no intention of competing for ticks with HFTs. But knowing these algo trading systems are not designed to be directional, and knowing they inadvertently move price up and down while working the bid/ask spread. This movement (price rotation) often allows traders to align themselves with the algo traders rather than fight them.

The VWAP builds continually throughout the entire session, with price weighted by the volume traded at that price. An uptrending market that is attracting volume from buyers will show a smooth rising VWAP, price will remain above VWAP and will build distance above it. Conversely, in a downtrend that is attracting volume from sellers, we will see a steadily falling VWAP. Price will remain below VWAP and will build distance below it. When we see price crossover the VWAP several times this is an indication we are not trending on the day. On range days, fading the oscillations above and below the VWAP often proves to be a successful trade.

I've found the VWAP a difficult study to write about. I don't consider the VWAP an indicator per se, I (usually) don't buy or sell positions based solely on the VWAP. I do however filter all decisions to buy or sell through a reference of where the last traded price is in relation to the VWAP and the SD Bands. For clarification of this statement think of this similar to the %b indicator reading derived from the Bollinger Bands, it tells me where the last traded price is in relation to the VWAP and the SD bands. This information regarding the location of the last trade can then be used to influence decisions based on other criteria, e.g. volatility, momentum bid/ask volume.


Last edited by Cashish; January 9th, 2012 at 03:51 AM.
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  #53 (permalink)
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There's no School like the Old School

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Chutes and Ladders

I often think of price movements in the 6E as chutes and ladders. Have you ever been just about to close out a long position that seems to have stalled out or just died and all of a sudden the price jumps 3, 6, or 8 points in your favor or slides against you and takes away half the profit? That's what I'm referring to as chutes and ladders. I believe the price levels between these moves can be identified before taking the position and by knowing these levels exist traders can anticipate sudden moves in and out of these areas. These sudden moves can be used to enter positions or take profits. I believe a real value lies in the awareness of these chutes and ladders, the knowledge of their existence may help reduce the fear of getting shaken out of positions shortly after entering. I've also found I can add to positions with very little risk by trailing the price movement with limit orders further behind the last traded price, and if filled on a sudden pull back (chute or ladder) they generally show a nice profit very quickly if the original move stays intact.

More Entries and Exits

These charts are representative of my analysis of the 6E on January 12, 2012 at 2am EST. The market was anticipating interest rate decisions from the BoE and the ECB at 7:00 and 7:45am respectively. Also US retail sales numbers and jobless claims will be reported at 8:30am. Given the fact few traders expected an interest rate change the most significant numbers on the economic report agenda would be the US Retail Sales numbers that were to be announced in 6 1/2 hrs. While remaining mindful of an unexpected change in rates my bias for the day prior to 8:30 am EST would be a thinly traded range bound market with the potential for sudden reversals on higher volume.

Prior to the Thursday 2am open prices had been consolidating in a 27 point range for 8 hours. All 5 POCs from the last 5 days of trading were within 88 points of themselves. The next POC to the up side is sitting at 1.2954 more than 150 points away. I identified three price levels (Intraday POC shifts during trade date 1-5-12) I thought would be resistance if the market staged a short squeeze, 1.2848, 1.2879 and 1.2900. Also prior to the 2am open I identified the trend reaction numbers, BN 1.2644, pivot 1.2719 and SN 1.2774.
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To elaborate on the concept of Chutes and Ladders I intentionally placed this post after my post about algo trading systems and the VWAP Study. I firmly believe the correlation between volume on price and the standard deviations of the VWAP are more than coincidental. Both the VH study and the VWAP study will for the most part generate the same indications of significant price levels regardless of the intraday time frame. I consider this an important positive aspect of these studies, this allows traders to basically trade any time frame while charting the VH and VWAP on another time frame. When attempting to implement the use of the chutes and ladders for entries and exits the time frame is somewhat irrelevant, this is more a matter of speed of fills and speed of moves in and out of price levels. IMO, many of these moves are caused by algo trading systems and as I hope to show in this post having limit orders resting in the market on these levels, which are commonly at or near the extremes of ranges in anticipation of that level being touched, traded on or thru then quickly revert back seeking equilibrium is a very productive method of positioning yourself deep within a trading range in anticipation of catching a greater portion of a bigger move later in the session.

This chart shows the VWAP study. The black line is the average price, red line +/- 1 SD and blue line +/- 2 SD. The bold red line is the POC shifts of the VH during this session and the dotted red lines are POCs from Friday and Wednesday. As this market is about to open there's a lot going on here around the last traded price.

Jan 6 POC .................................... 1.2727
Highest POC shift of this session .....1.2724
VWAP +1 SD .................................1.2724
Latest POC shift ........................... 1.2722
Last traded price ............................1.2720
Today's TR pivot ............................ 1.2719
Current POC ...................................1.2718
VWAP -1 SD .................................. 1.2715
Wednesday's close ..........................1.2712

But wait there's more, VWAP -2 SD, Jan 6 POC, the session low and of course the whole number 1.2700. These are all significant price levels this market will eventually have to sort out.
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I hope we can agree prior to the green line at 2am this market is non-trending. I've mentioned before a mean reversion trade at 2 am from the VWAP +/- 2SD is a high probability trade in a consolidating market. The problem I have with this trade is the profit potential back to the average is usually small (< 10 points). However, if price trades thru the average a touch or test of the other 2nd SD will make this trade more attractive. A simple rule for a stop on this trade is any close above or below the 2SD you're trading, but being aware of other significant prices "nearby" can offer a better indication of being right or wrong on the trade. The chart below shows price action continues to range around between the SD lines and the average. Now testing the session highs.
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After testing the session highs, a quick retrace back to the rising VWAP and POC (magenta circle) proves to be a great entry point for a nice up move. As defined in the More about VWAP post, "An uptrending market that is attracting volume from buyers will show a smooth rising VWAP, price will remain above VWAP and will build distance above it." This also reflects my thoughts of, a simple rule for a stop on the 2 SD trade is "any close above or below the 2SD you're trading." Remember we're trading into news releases here and the whole idea of this post is to highlight the significance of the volume levels generated by the VH (POCs) and the SD levels of the VWAP study. Moreover, the ability to use these levels for entries and exits. I find it fascinating how predictable these levels can become support or resistance.
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This chart shows a retrace of the entire European Session from the time of the final Interest Rate announcement right up to the minute of the US Retail Sales numbers. After a pause at the VWAP the market continued to sell off finding support at the previous POC level (1.2722) the TR Pivot (1.2719) and the VWAP -2 SD line (1.2718).
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In this early post, https://futures.io/trading-journals/15779-trading-6e-euro-eur-usd-futures-contract-old-school-twist.html#post174709 on this thread, @rainbowchaser made the following statement.

rainbowchaser View Post
Of course these days news about the Euro have been pretty intense.

Anyone familiar with currency trading knows how true this statement is and this day was an excellent example. Minutes after the US numbers were public, they were forgotten. Because the President of the European Central Bank was giving a speech and a mention of more stimulus by Mr. Draghi was enough to trigger a 131 point short squeeze. You gotta' love this stuff
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Reversion to mean trading can be a profitable option if market condition warrant it and risk levels align with individual traders money management criteria. Trying to show trade entries and exits on a thread like this is more difficult than you may imagine. My goal was to show the relevance of the SD levels generated from the VWAP. I look at many bits of information while making trading decisions this post highlighted how I incorporate the VWAP and VH into reversion to mean trades. I also took the opportunity to comment on the surprise breaking news event and show how these price levels once again came into play. These price levels are real, I believe they hold tremendous power in the market, they can bend like reeds in the wind or stand firm as iron. Identifying these levels is only one step of the process, developing a method or system to fit your trading style or personality may be another.

In this post I made no mention of the Bollinger Bands or "Oil Cans" but you may well imagine they play an important role in my decision making process for reversion trades.

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Hello Cashish,

Thanks for this thread it has been very insightful. I use VWAP in my own trading so it is interesting to read about how you use it in yours. What are your thoughts on stop placements if you are initiating trades in the direction of the trend say at the VWAP or +/- SD1?

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First of all thanks for this great thread and your detailed posts.

Could you describe which type of POC you use. Iīm new to this subject and found out there are different methods of calculation (TPO, VOC, VWTPO). In NT 7 I tried various indicators with different settings but I didnīt get the same results for the POC shown in your screenshots.

Thanks in advance.

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This thread is going to the dogs





That was really funny, I LMAO....NOW BACK TO STUDY VOLUME... STILL A PUZZLE FOR MY "PEABRAIN"..

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dakine View Post
Hello Cashish,

Thanks for this thread it has been very insightful. I use VWAP in my own trading so it is interesting to read about how you use it in yours. What are your thoughts on stop placements if you are initiating trades in the direction of the trend say at the VWAP or +/- SD1?

Thank you @dakine I'm glad you're finding this thread insightful, I assure you writing this stuff is a lot harder than it appears. With that being said this comment/post and my next comment/post may be proof of how easily pertinent information can be lost in translation

I think most traders would find it easier to describe the flavor of artichoke hearts, than try to offer thoughts on stop placement. But I will offer some fuel for thought.

The notion of chutes and ladders, like many aspects of trading seem to provide a contradictory purpose. For example, if a SD level is used as a profit target to the up side and profit is taken and my positions are flat, if price continues to go up, that same level can often be used as support. A limit order a tick or two above or below the SD level will often get filled and get you back into the trend. I've said time and again, "being aware of other significant prices "nearby" can offer a better indication of being right or wrong on the trade." The example on my last post of several significant price levels clustered together at the open, was meant to alert traders that these situations do exist and are not that uncommon, if you're aware and take the time to identify these levels.

For me, stop placement is a "per trade" decision process. When I enter my order I have a entry, target and stop. The stop is always (N) points behind the entry when the entry is filled, the target is always (N) points ahead. When filled I might move my stop up to a level 10 points under the entry or 5 points under. Same is true with the target, as soon as the entry is filled I get to work managing the trade, both the target and the stop. I hope this helps, and thanks for following the thread.

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TempletonPeck View Post
First of all thanks for this great thread and your detailed posts.

Could you describe which type of POC you use. Iīm new to this subject and found out there are different methods of calculation (TPO, VOC, VWTPO). In NT 7 I tried various indicators with different settings but I didnīt get the same results for the POC shown in your screenshots.

Thanks in advance.

Thank you, @TempletonPeck

I covered a lot of this starting with this post, https://futures.io/trading-journals/15779-trading-6e-euro-eur-usd-futures-contract-old-school-twist-4.html#post177241 but I'm happy to review and do my best to answer you directly.

I use Volume on Price, the above post describes the calculations. In this post, https://futures.io/trading-journals/15779-trading-6e-euro-eur-usd-futures-contract-old-school-twist-4.html#post178595 I mention I use different starting times for my Volume Histograms (VH). One chart starts at Globex open 18:00pm EST another starts at 02:00 am EST, this may be where you are a little off in comparison to my charts. And yes, when calculating the VH on a 1, 5, 15, 30 or 60 minute chart you will get different readings, I described the reason for this in the first link posted above. Remember traders, I'm posting examples here. Our software and data may influence our individual displays, to some extent.

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Who would have figured ?


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Quick one, is your time zone ET? Thanks.

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There's no School like the Old School

Learning How to Lose

When I started trading, a friend gave me a simple system for trading the Deutsche Mark. It was based on a series of 20 day moving averages and generated profit targets of 200 and 500 points. This system worked and I started making money right from the start. My friend told me I was lucky with my first entry but assured me, if I could stick with the system I would continue to make money, I did.

All the entry and exit signals of this system were based on the close (RTH), with one exception. If the position showed a 500 point profit intraday I was to liquidate the position and take profits. The next rule of this system was, if I closed out the position for a 500 point profit, I was to sit out the next four (4) signals.

I knew the friend who gave me this system was a successful trader, he always reminded me to stick with the plan and trade the rules as outlined. I know many traders search high and low of a system with hard code-able entry and exit rules, I guess I was lucky. As I continued to trade, I learned holding trades for weeks or months just wasn't my style and didn't fit my personality. Changes in the currency markets along with the changes toward electronic markets caused my trading to evolve and I became more short term oriented.

Holding an open position for a couple of weeks is a lot different than holding a trade for a couple of minutes. But it may surprise some traders to know the psychology of these two styles of trading are very similar. At the most basic level, all my trades have but two possible outcomes, they're either winning trades and my equity increases or they're losing trades and my equity decreases. It is that simple. My intent with this post is to share my experience with the psychology of trading, but to add a twist I'm going to share my experience with the psychology of losing, you may be surprised.

The Fear Factor

I have friends that know I trade, everyone of them at one time or another have asked me the same basic question, "Aren't you afraid of losing your money when you enter a trade?" My answer is always the same, "You're damn right I am!" The difference between their fear of losing money and my fear of losing money on a trade is their total lack of trading experience. To put it bluntly, they have no idea what they're talking about, they've never traded. The initial thought many of my friends have is they would lose all the money in their trading account, their savings, their homes, the family farm and their first born child! To compare, losing money on a trade to me generates about as much fear as buying a half a gallon of ice cream on a hot day and hoping it doesn't all melt before I get home. There's no way around it, who among us wants to lose, not me. That's why, I always know exactly where I'll exit the position when I feel my analysis is flawed or the market sentiment has changed. The fear aspect of trading is real, the effects that fear has on my body is also real. I can gauge the effect this fear has on my body by using a pulse monitor or blood pressure cuff. I don't advocate "discipline" or trying to "control your emotions." I suggest traders become absolutely comfortable with the amount of capital they need to place at risk before they enter the trade, feel the feeling and become comfortable with it, it is a major part of trading. Fear is an emotion as old as man, it alerts me that something is threatening me and may cause me pain. Don't get me wrong, I can easily find my threshold for fear in the market by increasing my position size. I call this a healthy fear but one that needs to be pursued with strict money management rules. In my own trading, I found if I focused my efforts on controlling my actions instead of controlling my emotions, the intensity of the emotions dropped dramatically. IMO, to be a successful trader, "A man's got to know his limitations."

Fear, Fear and more Fear

When I began to get serious about my trading I took a detailed inventory of my trading behavior. I found greater or lesser degrees of fear to be the dominate underlying cause of my trading issues. Other than stupid trading errors (e.g. miscalculations, buy instead of sell, unaware of news) all my demoralizing actions could easily be traced back to fear, I found fears on both sides of the trade. I found myself entering trades to early due to a fear of missing out on a move that may or may not materialize. When those trades didn't materialize and continued to go against me I found myself holding losers to long due to a fear of missing out on the positive move that never came. When the trades did go my way I found myself taking profits to early due to a fear of giving back what profit I had on the winning trades.

Learning How to Lose isn't some clever play on words. I had to learn how to lose, and be comfortable within my own skin. I found that when I closed out losing trades I began overtrading due to a fear of ending the day with my account in a drawdown. I also noticed if I did experience some limited success and made a little profit during the session I found myself overtrading again due to a fear of not making an (X) dollar amount per session that I had unrealistically set for myself. In both instances the trading session was usually very stressful whether the outcome was positive or not. Learning How to Lose a predefined amount of risk capital, and closing down my trading station for the day was probably the hardest and most profitable (over the long term) trading skill I've learned.

Winning trades can also generate fear. Huh? What? If any one reading this post takes any thing away, let it be this. Winning trades can generate fear. Closing a well analysed and executed trade with a healthy profit is a very satisfying experience. After closing out a picture perfect successful trade, it wasn't uncommon that a fear of giving back some of those profits kept me from entering again as price continued on in the favorable direction. This fear of giving back some of the earlier profits is then intensified with another blast of emotion, due to regretting the decision to stay out of the market.

Winning trades are not as emotionally charged as losing trades. After I'm in a position my job consists of simply executing a simple order based on three parameters buy, hold or sell. While a winning trade is moving in my direction and begins to approach my predefined target any adverse movement has the ability to trigger that fear of giving back my unrealized profit. Since the market is always in motion and basically never stops fluctuating the simple decision based on the three parameters (buy, hold or sell) becomes a continuous process of deciding how much is enough from both a profit and loss perspective. I've found for me, a losing trade will generate "an emotional factor" many times greater than a winning trade of the same ($) dollar value. I've learned (the hard way) I'm never truly satisfied with the profit of any trade. This last sentence may sound absurd but I assure you, when I came to accept it as a fact, perceptible changes in my trading followed.

"A man's got to know his limitations."

I stated earlier I don't advocate "discipline" or trying to "control your emotions." I want to clarify that statement. To do so I also want to add this statement, "In my own trading, I found if I focused my efforts on controlling my actions instead of controlling my emotions, the intensity of the emotions dropped dramatically."

I never found a way to directly subdue my trading fears (emotions) by using meditation, visualization or self talk. IMO, my attempts to do this was an honest effort to "control your emotions." Further, although I "disciplined" myself to follow these practices the outcome proved uneventful for me.

I believe if an aspiring trader has developed a proven method of trading which consists of realistic entries, exits and risk management and is still struggling with maintaining consistent profitability, focusing on his/her psychology will propel them to where they want to be.

Trading is all about risk, as a trader I had to be absolutely comfortable with the amount of capital I was willing to lose on each trade. More importantly I had to have a realistic understanding of the absolute maximum amount of drawdown I was willing to accept before I stopped trading and reassess my method. Personally, I chose a drawdown 3 times the size of my systems backtested results. I think of my trading and available capital like flying an airplane under a set of power lines. I start off under the wires and my goal of course is to fly above and continue to go higher, but if I struggle and begin to lose altitude I can land safely, refit, reassess my method and continue trading. Holding a clear understanding of my realistic risk capital and expanding my evaluation horizon from a single session to one week and later one month alleviated "the intensity" of the amount of capital I was putting at risk on individual trades and allowed me to focus on execution of trades and execution of my stops in a "disciplined" way. Part of Learning How to Lose is knowing when you are losing on each individual trade, admitting it without hesitation and closing the trade. This trade may need to go against me 10 points before I call it a loser. This trade may need to go against me 30 points before I admit my analysis is wrong and I must close the trade for a loss. I'm speaking of discretionary trading here, automating stops is a topic for another thread. Trading is an arena where seconds count, and doing nothing can cost you $$$. While learning how to lose I found having something to do immediately after a loss can be very helpful. I found if I had a couple projects setup each day and if I suffered a loss I could walk away from my screens and go change my lawnmower blade or change out the flapper valve in my toilet tank, you might think this is funny but believe me it clears your mind and that's what you want to do.

Overtrading is usually a direct result of trying to hurry up and make back a loss. Until I found a way to clear my head from a loss and treat each trade on it's own merit I did all sorts of reckless trading. The idea here is to stop emotional driven trading, and if closing out a losing trade generates an emotional shit storm, even if it is within your predefined risk level, the safest place to be is away from your mouse. So go fix that cabinet hinge or frame that picture that's sitting against the TV.

If my first trade goes profitable fast and pauses at the support or resistance levels I identified prior to entering the trade this may be an indication I'm in tune with the market. However if that pause is prolonged and price creeps anywhere near my target or if an economic report is approaching and I planned on being flat when the release comes out I'll close the trade and go put a coat of paint on a flowerpot, and come back later during the economic report release. If I feel gripped by the emotional fear of giving back my realized profit when I return I'll shut down my trading station and call it a day.

Trading is a serious business to me, I've had traders come and trade with me but mostly I trade totally focused and totally secluded. When I'm trading I don't pay bills online, balance my checkbook or surf the web, I trade, I focus on price movements of a few markets and keep an eye on breaking news (no TV). I trade the 6E from 2-6am est most every day, if I'm not in a trade at 6am I shutdown my trading station and go on with my life, if I am in a trade I'll stay focused and manage the trade to its fruition. Since the market is continuously moving, this offered a tendency for me to see the movements during the times I wasn't at my trading station as missed opportunities, i.e. regret of missing out. If time allowed I often found myself lured into the market during a time of day I wasn't accustom to trading. I'd put on a few emotionally driven trades, "wanting some of that action" usually closing them out for losses then trying some other reckless entry trying to make back my losses, we all know the story. I strongly suggest to aspiring traders to allocate a "time to trade" and stick with it day after day, especially in the beginning. There are reasons for this recommendation, markets have personalities and characteristics derived directly from the participants involved. Using the 6E as an example, the Asian session trades differently than the European session and the European session trades differently than the U.S. session. I firmly believe if "a little guy" wishes success in trading it would behoove him/her to focus intently on one market and develop a thorough understanding of it's quirks and nuances.

When it comes to trading it pays to be a good loser. I hope this post is taken with the seriousness it deserves. I can't stress enough the value of Learning How to Lose. Wanting to be right, risk VS reward, the market is always right, control issues, my beliefs about greed and my fears of failure. The old cliches hold powerful truths when we begin to understand them on a psychological level and feel them on a physical level. Embrace the uncertainty of the market during every trading session, feel the feelings generated when taking positions. Focus on controlling your actions and discipline yourself to do what needs to be done. Embrace the uncertainty and get yourself comfortable accepting the risk. Embrace the uncertainty and trust your analysis, enter trades without hesitation. Embrace the uncertainty and trust your analysis, exit losing trades without hesitation. Embrace the uncertainty Embrace the uncertainty Embrace the uncertainty

Thanks guys for your continued interest in this thread

And yes @rainbowchaser all times are Eastern Time ....... the right coast


Last edited by Cashish; February 14th, 2012 at 06:40 AM.
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