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

This is Masters week, and although my personal golf experience has never extended much beyond clearing the windmill on our local putt putt course, given everyone’s obsession with the game, I thought it might be interesting to focus on the preeminent player of the game – Tiger Woods – to see if there is anything he can teach us about trading.

In fact there is.

Here is an exert from Wikipedia that describes Mr. Wood’s approach to the game.

While he is considered one of the most charismatic figures in golf's history, Woods' approach is, at its core, cautious. He aims for consistency. Although he is better than any other Tour player when he is in top form, his dominance comes not from regularly posting extremely low rounds, but instead from avoiding bad rounds. To illustrate, the standard deviations of Woods' 18-hole scores are typically lower than those of most Tour players. Woods plays fewer tournaments than most professionals (15-21 per year, compared to the typical 25-30), and focuses his efforts on preparing for (and peaking at) the Majors and the most prestigious of the other tournaments.

Note the emphasis on playing fewer tournaments. This may seem counterintuitive to most of us who might think that playing golf more would make Mr. Woods a better player, but in fact this is the core reason for his success. Tiger Woods does not enter tournaments merely to play, he enters only those tournaments where he believes he has a reasonable chance of winning. The lesson to us traders is clear. Long term success in both golf and trading is highly depended on the participants ability to judiciously select the best possible opportunity for winning. We shouldn’t come in to the market merely to trade, but only when we think we have an overwhelming chance of winning. Thus making fewer, but more accurate trades is a much better method to creating a long term profitable record.

Yet, making good selections does not guarantee success. Before the Master’s tournament began many experts would have picked Mr. Woods to win or at least to share the leaderboard. Yet here we are on Saturday and Tiger is 5 strokes back all the way in 15^th place. Why? Well there may be many reasons but one possible explanation is that no one anticipated the unbelievably cold weather (thank you Canada) that has settled over most of the Eastern United States this week likely affecting Mr. Woods play. He simply ran into a meteorological “brick wall” as his performance to date speak to that fact.

Figurative “bricks walls” appear in many times in real life. Our USDCAD short was a perfect example of this dynamic in action. We went into the trade based on the following assumptions.

1. Iran –UK conflict would be resolved peacefully
2. Price of oil would recede from its recent highs
3. Canadian Housing Activity would decelerate in March
4. US Non-Farm payrolls would print materially higher than forecast.

So, did #1 happen? Yes.

#2? Yes

#3? Yes

#4? Yes again.

Yet the trade failed. Why? Because we ran into a smack dab into a brick wall of economic data when Canadian employment rose 5 times more than forecast greatly surprising the market. The news of course turned sentiment completely around and stopped us out of the trade.

The key thing to understand however, is that while USDCAD was a losing trade it was a good one. The analysis behind the setup, both technically and fundamentally was sound, but we ran into unexpected news. Every single trade you make is ultimately an expression of faith. There are only two types of assumptions underlying every trade ever made.

1. A trader either anticipates some future events that will force the market to re-price the current value of the position in his favor. Or -
2. A trader believes that the most recent news events are so significant that they will result in continuation of price direction as more and more market participants accept his point of view.

That’s it. You can only be pro-active or reactive in the markets. Just like in golf and for that matter in life, the best prepared plans in trading can always go awry. That is why focusing on one or two or three losing trades is a common but terrible mistake that most traders make. As human beings we don’t like failure, yet we accept it in sports all the time. The best baseball players fail 7 put of 10 times. The best soccer players fail probably 49 out of 50 time before they score a goal. Yet somehow when it comes to the markets we expect to pitch a perfect game every time.

As we noted every trade is a matter of faith in the future. Presently we are holding USDJPY long on a sound assumption that the positive US NFP numbers and rising US Bonds yields will create more demand for the carry trade. So far we are in the money, as the trade is confirming our thesis – but could it be sabotaged? Of course. The BOJ could come out Monday night and raise rates another 25bp – creating turmoil in the market and negating our assumption. Is it probable that they will hike rates? No, that why we are in the trade. Is it possible? Of course, that why we always trade with stops and control our risk

As you know our goal with BK Advisor is to show you reality based trading rather than offer you just a bunch of platitudes, so we will leave you with the following chart http://docs.google.com/Doc?id=dn8z7zs_87d56kc7. We cannot tell you specifically who generated these trading results, but suffice it to say this comes from a bank that is one of the biggest FX players in the world. Furthermore, know that if you followed the trading recommendations of this bank you would have made 1.5 Million dollars on a 1 Million dollar account without any leverage in a period of five years. Yet looking at this series of results, which were part of the long term trading record, how many traders would have the patience to have absorb 14 losses in a row? Yet those who did, persevered and walked away net winners.

Please don’t misinterpret our message. We certainly have no intention of generating 14 losers in a row. We know our record lately has been horrid. We are now both back on the desk and both back in sync with the market. Although much as we would like to we cannot guarantee success, we can assure we will be doing everything we can to provide you with much better ideas going forward.

Next week is extraordinarily boring from an economic calendar point of view, but as usual I will email everyone on Sunday with the major theme and event risk calendar in tow.

Wishing you all the best week-end

B & K