Where is the Exit?

My dad, used to always tell me – don’t let the perfect be the enemy of the good. As an unreconstructed perfectionist, I’ve always had a hard time following that advice, but this week really showed the price of ignoring those words.

Trading as we all know is hardly a precise discipline. As the ultimate barometer of human emotion it is inevitably messy, frequently frustrating and often an exasperating activity. The best that we can all hope for is to make three steps forward and only two steps backward, thus keeping us ahead of the game in the long run. This week, I passed on many good opportunities that could have resulted in profits. I could lay the blame for making so few trades on the fact that I am alone at the desk as K continues her trip of the Far East, but that would be an unadulterated lie. And as many you know, that while we cannot guarantee success, we try to be as honest The plain truth of the matter is that I simply chocked this week, passing on perfectly reasonable trades is search of the “sure thing”.

No more.

I know that you look at BK advisor as not only a source of good trades but a source of multiple trades ideas. So starting next week I promise to deliver them all to you, lose win or draw, and furthermore I will also try to point out the danger of each trade along with our usual entry, stop and target parameters.

Meanwhile let’s just look the following graphic to show you the themes I sketched out at the start of last week and some of the trade setups that we could have taken had I been less conservative in my approach.

http://docs.google.com/Doc?id=dn8z7zs_7754xbbw

I will have the our Google calendar for next week prepared by Sunday as always sketching out the main themes on the Sunday panel and the event risk on the rest of the calendar.

As many of you know my setups are primarily fundamental in nature while K’s are driven mostly by technical factors, I trade in the direction of the newsflow but I do use technicals to manage my exits. Several of you asked about the reasoning for our exits so I thought we could use this weeks trades to examine some of our exit strategies.

Short EURCHF +20

This trade was based on the idea that Swiss eco data continues to post blowout results while the EZ indicators are showing some danger of slowdown. However, as has been the case over the past few weeks, the market really only cares about two themes right now – carry trade and risk aversion. Therefore despite great numbers from Switzerland, as the week went by, EURCHF actually rose as risk appetite returned and stoked demand for the carry trade. We were fortunate to make money out of this trade by keeping a careful eye on the technicals. Note the first spike bottom on the chart at 1.6115. Once the pair failed to break that key level, we quickly covered for +20 which turned out to be the right decision as EURCHF eventually went on to rally above the 1.6200 level.

http://docs.google.com/Doc?id=dn8z7zs_79d85xz4

Short EURGBP –8

This trade was triggered by the very strong UK Retail numbers which we thought would push EURGBP lower still on interest rate hike expectations by the BoE. Typically the signature of my trades is that they resolve themselves within 3-6 hours of entry as the fundamental newsflow pushes the pair in the direction of the trade. However, in this case the pound had already rallied sharply throughout the week, so the impact of the positive news was considerably weaker. Instead of trading lower EURGBP stalled and tormented me for more than 24 hours flirting several times with the stop. Out of sheer frustration I exited trade at –8 and of course to add insult to injury the pair dropped almost instantaneously after my exit. In a follow up note I wrote, “No one can make you feel stupider than Mr. Market, no sooner did we get our of the EURGBP short the trade moved our way. For those fortunate enough to ignore our advice please feel free to take profits now. Most importantly place your stops at breakeven or tighten them to no more than -10 to protect your capital. ” The proper action in that trade would have been to lower the stop to 6790. Since I wasn’t as confident in the trade 24 hours later as when I first put it on, the lower stop would have curtailed some of the risk, but allowed us to stay in the trade in case it finally moved in our direction.

http://docs.google.com/Doc?id=dn8z7zs_81gcmf9s

Short USDJPY –22

Sometimes its is absolutely incredible at how stupid the markets can be. Iranians seized 15 UK sailors in Iraqi territorial waters in what was essentially an act of war and the markets simply shrugged it off as another day at the office. Sure enough news over the week-end is that Iranian President Mahmoud Ahmadinejad’s has cancelled his trip and planned speech at the United Nations Security Council in New York and Iranians now claim that the Brits have “confessed” to broaching their territorial borders. In short the crisis escalates and it would be interesting to see if this flare up will finally bring some risk aversion to the market. In the meantime we followed the long held dictum of Lord Maynard Keynes who stated that markets will remain irrational far longer than we can stay solvent, and quickly cut our losses once we saw the price refusing to cooperate with our point of view.

We wish you great trading next week and look forward to sharing many more trade ideas with you.

B & K