Boris and Kathy's FX Blog www.bktraderfx.com

Week in Review:

Some wise man once said don’t ever watch sausage or politics being made. He may as well have been talking about trading because behind every gleaming hedge find return lie many dumb trades hidden from investors eyes. All of this in no way serves as an excuse for some of the boneheaded calls we’ve made this week and we will deconstruct every one of our trades to separate the good, the bad and the ugly later on. But before we begin we wanted to step back, welcome many of you new to the service and also take a few moments to familiarize you with our goals, our style and our future intentions for the BKForexAdvisor.

Our two primary goals with this newsletter are

1. Trade ideas
2. Trading education

We aim to harvest between 150-200 total points of profit per month seeking to generate a return between 18%-24% per year without leverage or 180%-240% if you areusing 10:1 leverage. No doubt these are ambitious goals and of course there is absolutely no guarantee that we will meet them or not lose money. We try to achieve these goals by taking 3-5 trades per week using small amount of risk. The irony of course is that by taking more frequent trades with tight stops we will likely have more misses. Sometimes the process can be painful when we miss several trades in a row. We know and deeply appreciate that fact and will work very hard on trying to minimize these drawdowns going forward. But please know this - we always try to control risk and since our misses are limited they are easily recoverable and therefore we generally stand a reasonable chance of making our target of 100-200 points every month. Some of you have asked us to offer longer trade ideas that require less intensive watching of the markets and we will introduce those recommendations in the near future. So to summarize:

1. Our goal is to make 150-200 points per month
2. We take 3-5 trades per week (Closer to 3 rather 5)
3. We will soon introduce 1 longer term trade idea per week
4. On the days when we issue no recommendations we will present interesting research or new trading strategy so that you will get a benefit from BKFoprexAdvisor every working day of the week.

To start your free trial, visit bkforexadvisor.com

Now let’s review our trading style. There are three types of trading techniques we utilize.


1. Two lot Scale out.

This is our most common technique where we enter a trade at market with 2 lots. We set a relatively tight stop usually no more than 30-40 points and then set two targets. Our first target that we call T1 is very conservative as we are trying to essentially make sure that our trade thesis is correct, book a little profit and reduce our risk. Our T2 target is much more aggressive usually at least three times our risk. When our T1 is hit we move the stop on the rest of the position and target our T2 limit. Typically we hit our T2 target 1/3 of the time and although they are relatively rare, it is those trades that produce the bulk of the profits.

2. The One and One

In this method we enter only with one lot and one take profit target and then put out a limit order to see if we can get a second lot at a better price than the current market and put a much bigger take profit on the second lot. We put the same stop on both orders. This technique is used with selling key technical breaks. Sometimes when price breaks support and resistance it continues straight in the direction of the break. Sometimes however it retraces somewhat before creating enough momentum to follow the initial impulse. Because mo one ever knows ahead of time when one or the other scenario will happen, we use this technique to provide us with a higher probability of success by allowing us to get a blended price with less risk.


Figure one illustrates the 1 in 1 on the NZD/USD

Figure 1

3. The One and One with Limits

While the one and one strategy is good it has a drawback. By waiting for support or resistance to be broken and then entering at market, the trader is often late to the trade and gets a bad entry price on the first lot typically near the low of the move. The one and one with limits is designed to combat that problem.

Following are the rules for a break of support – the rules for a break of resistance are simply reversed.


1. Set a limit order to sell a few points below resistance for one lot only

2. Set a limit order above the breakdown level in case price retraces

3. Set the same stop for both lots

4. Use the standard T1 and T2 scale out method to book gains.


Notice how the limit one and one improves the execution on the prior NZDUSD example.

NZDUSD example

Now that we had the chance to see our methodologies lets discuss this week’s trades.

First of all let’s note that we had seven trades this week which was way to much as we seriously overtraded. Each week there are no more than 3-5 good ideas and we will be far more selective in choosing trades going forward.


1/08/07

Short GBPUSD –52

Short EURJPY –58

Both of these were poorly thought out trades as we sold on what was short term overbought hourlies but managed to neglect the fact that we were selling right into daily support. Furthermore our fundamental reasons were very weak. In the case of EURJPY carry trade liquidation has been going on for several days and was essentially finished, while the dollar had no positive news behind it and in fact was coming off a false gas terror alarm in New York.


See EURJPY Chart

1/9/07

Short NZDUSD 0

This was perhaps the most boneheaded play of the week and I (Boris) take full responsibility for it. We were right on the theme of the day which was commodity dollar weakness due to the overall weakness in the commodity markets. Our entry execution could have been better (we should have used the limit one and one rather than just plowing in all at once) and the trade went to nearly our stop price before coming back down. When it started to head back up I decided to take the trade off not liking the risk at that moment. Of course soon thereafter the trade proceeded to drop in our original direction easily hitting T1. The lesson here is to leave your stops alone. They are there for a reason. Price did not violate them and I should have let the setup run its course.


1/10/07

Short USDCAD +20

This was a well conceived trade that was executed perfectly with a one and one entry but unfortunately could have been closed much better. We achieved T1 on the trade but should have lowered our stop once price moved near T2 territory to capture more profit. Our thought was that this was the really big turn in USDCAD and we really wanted to milk the second lot for as much profit as possible and therefore decided to give the trade room. Unfortunately oil prices dropped through the floor in overnight electronic trade, sending USDCAD sharply higher in a matter of minutes

1/11/07

Long GBPUSD -30

Good idea because BoE raised rates and in fact GBPUSD has rallied higher since, but we rushed the trade ahead of the ECB press conference and got caught in the downdraft after Trichet’s dovish stance. We speculated that there was a chance that this might happen and our only saving grace was to take a 1 lot position only instead of our usual two

1/11/07

Short EURGBP +14

Best trade idea of the week as the BoE was hawkish and the ECB was dovish and this trade worked like a charm from the get go. It was very well thought out fundamentally and properly entered technically.

1/11/07

Short EURCHF –50


This was just one of those frustrating trades where the stop gets clipped and then it turns your way but this type of scenario will happen hundreds of times in your trading career and you just have to accept that this is part of the game and move on.

Well this is a missive worth of Tolstoy and we hope we did not bore you too much, but we felt it was important to discuss all these issues in detail so that we may start next week with a clean slate and more selective approach to better trades..

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Wishing you all a great week-end,

Boris and Kathy