In his seminal book on trading Market Wizards, Jack Schwager interviews one mysterious currency trader with penchant for meditation and Sanskirt who is uncannily successful in making profits for his employer. The start of the chapter contains the following exchange:

Schwager:

How do you recognize when (your trading power) goes away?

Trader:

When I am wrong three times in a row. I call time out. Then I paper trade for while.

Schwager:

For how long do you paper trade?

Trader

Until I think I’m in sync with the market again. Every market has a rhythm, and our job as traders is to get in sync with that rhythm.

The trader’s identity has never been revealed for certain, but I believe that it was Andy Krieger who said those words. He was so phenomenally successful in the heyday of interbank currency dealing that he managed to earn 300 Million dollars for Manufactures Hanover ( which has since merged with Chemical, which in turn became Chase, which is now JP Morgan Chase) in just one year.

This small snippet from 300+ page book is almost a throw away paragraph. Few people ever recall it. But ever since I’ve read it many years ago I’ve always thought those words held special meaning. Now, I am even more convinced that this little exchange is perhaps the wisest advice ever given to traders.

Losing streaks are universal in trading. Anyone who has day traded for longer than six months will recognize that fact. George Soros lost $1 Billion dollars in the Russian ruble fiasco, but everyone remembers him as the man who broke the bank of England. Michael Steinhardt was decimated in the emerging debt market meltdown of 1994, but he is revered as the one the greatest hedge fund managers of all time. The reason most novice investors and traders never appreciate the true risk of the game is because they rarely see it. Typically, most traders simply look at their end of the year statements and only see the end result. Rarely do they realize that their money may have suffered a 20% loss sometime during that year.

One of the great aspects the BKForexAdvisor is the fly on the wall view to trading that it affords the subscriber. Real trading, like real life, is a three steps forward, two steps backwards affair.

While I was away in Dubai, K was blazing hot for the first week hitting 6 winners in a row, but then she hit a wall in the second chalking up 4 losses. What happened? Markets got funky, her setups – the same setups she used the week prior – simply stopped working as she got out of “sync” with the market. One of the key differences in the currency market over the past two weeks has been the strong correlation with the equity market. In fact CNBC could not resist putting up side by side charts every half hour on the hour of the USDJPY and the Dow Jones industrial average showing the near tick by tick matching movement of the two instruments. This unusual sequence of events rendered many of the typical triggers of FX movement practically moot and introduced huge unpredictability into the market. Therefore, when I returned to the desk this week, as K left for her trip to the Far East I decided to tread cautiously and traded very little. Although this may have been frustrating to some of you, I remain convinced that this was the right course of action.

We are up 117 points or 11.7% on a 10:1 lever factor year to date – hardly a stellar performance – but a positive one nevertheless. The reason why we have been positive is because we remain vigilant about not giving our profits back. Every story of failure in trading is the same. It always revolves around the desire to “get the losses back quickly”. Instead of stepping back and “paper trading” when they hit a rough patch most novice traders press on and force the issue. The results of such stubbornness are predictably dismal. That’s why that little exchange in Jack Schwagers book has always stayed in my mind. It is remarkable how that simple piece of advice is ignored by most novices, who do not understand that the key to trading is the ability to manage your losses, not your wins.

Turning to our trades this week, we got clipped on the USDCAD short (-45) which again was the part of the setups that were simply not responding to the current market action, as the pair looked like it was ready to come down to 1. 1600 only to be caught up in the US equity market collapse . As we wrote at the time, “The breakdown in the US stock market seems to be hitting USDCAD as people fear that Canada will be particularly hurt by the downturn in the US economy”.

We did better with the second trade our EURUSD long (+17) but not before that trade tortured us by coming to within 5 points of the stop. Of course nn retrospect, we took our profits too early, but at the time it was impossible to predict the breakout in the pair, especially given the very weak price action that occurring at the moment.

With the markets now revolving around the key theme of US housing problems, we think next week will be a much better environment to trade and we expect to generate many more ideas for you. Furthermore, we received requests from some of you to trade specific setups from our e-book, so I have decided to modify the RSI Rollercoaster setup for the risk parameters of the newsletter and will add it to our arsenal next week as the opportunity affords.

The RSI Rollercoaster setup will be modified as follows.

1.We will trade 15 minute charts

2. Looking for Currency pair to leave the RSI overbought (+70) or oversold (+30) zone before initiating a trade.

3. We will use the swing high/low as our stop points, risking no more than 30 pips per trade and will target 20-50 points of profit.

4. We will trade this only on the currency crosses, to eliminate as much as possible the fakeouts due to event risk on the dollar denominated pairs.

This is a short term reversal setup that looks bank 20-50 pips with during intra-day pints of price exhaustion. It’s strictly technical in nature, but if we can we will also look for fundamental triggers to increase of our chances of success.

For more info on this setup please refer to our e-book.

Finally, tomorrow, before the start of the week I will post on our public google calendar the key themes and possible trades ideas that we are looking to exploit this week.

Wishing you the best of trading,

B & K