“Dear Kathy & Boris: You both are doing a really great job. I guess we both should have had more faith in our original trading plan and stuck with it 80 minutes longer and it would have been a spectacular trade. I had exited just before your email about exiting your position. Thanks again and I hope you're both getting wealthy. I'm just learning and have made a lot of mistakes.”

An email from a new sub this week after our short USDJPY trade which we closed out quickly for +30 point profit after Japanese inflation printed, worse then expected. The trade then continued our way for as much as 30 more points just as the subscriber pointed out.

So, did we make a mistake on that trade? Absolutely not. We were incorrect on our analysis and quickly abandoned the position once the news came out. The trade was wrong but it was mistake free. To understand this distinction is to see the difference between how professionals and novices trade, so let’s examine it in more detail.

We shorted the USDJPY on the assumption that Japanese inflation would be hotter than the month prior. We had good reason to think so because the inflation level in the Corporate Goods Sector was twice the level of the month before. However, the inflation numbers actually printed very weak providing no reason for us to maintain the position. USDJPY did go down after our exit, but that was for completely different reasons than our trade – the Shanghai stock market saw some selling. Since our plan was based first and foremost on the inflation data, not risk aversion, we stayed true to our plan and executed that trade perfectly.

It is very common for new traders to play the “couldda, woudda shoudda” game. Especially when they have the foresight of history at their back. Yes the USDJPY did drop, but that completely immaterial to the trade plan and only seemed obvious after the fact. Indeed it could have just easily gone the other way as it very much did by the end of the week ending at 121.75 well above our stop levels as the Shanghai quickly recovered its losses.

To understand this further let’s look at the next trade we put on - the short EURCHF position. The trade was predicated on the idea that the Swiss KOF index of leading economic indicators would print a very strong number assuring that the Swiss National Bank would raise rates 50bp at its next meeting in June. The number did come out rather strong at 1.95 vs. 1.90 the month prior, but failed to break the key 2.00 level that would have convinced the market of a 50bp hike. We instantly blew out of the trade for a tiny –6 point loss. In fact, those of you who were the chat room may remember that I actually wrote,:

May 25 5:31 AM [Boris] data flat we are out 1.6488 -6

May 25 5:31 AM [Boris] KOF did not hit 2.00

May 25 5:32 AM [Boris] may still go down but the reason for our trade is negated so we are out

Three hours later by 8:00 AM EST that day the pair was trading at 1.6507 and if we had stayed in it we would have taken an unnecessary –40 point loss.

Indeed out of all our trades this week only one the NZDUSD short played out just as we expected as far event risk was concerned. Nevertheless we managed to bank 155 points for the week by sticking to our trading plan and minimizing mistakes. So the moral of the story is that in trading it is perfectly okay to be wrong. In fact expect to be wrong far more that you will be right. Being right is not what makes you money in the long run. Minimizing your mistakes by sticking to your trading plan is what separates winning trades from losing ones.

As a very good FX trader by the name of Ashkan Balour says in our upcoming book, “But really, the best trades for me are when I just do everything right for the day. Whether I made 15 pips, 12 pips, 8 pips that day, 20 pips everything works the way it was supposed to. Even if I’m down one day, but I took my stops, I know that was a good day too. The best days are when everything goes well according to your plan.”

The data this week is again very back end loaded, so we will be in touch after the Memorial Day holiday with more trade ideas. There will be no trades on Monday and the outlook for the week ahead will be recorded by K on Tuesday.

Wishing everyone a great holiday week-end

B&K

Friday afternoon I asked my dad, what’s the difference between loosing and winning in life? The ability to have a cold martini at the end of the day, he replied with a smile in his voice. My dad, who has seen more than his share of challenges over the past few years understands that true success does not depend on winning and losing but on how you handle each occasion.

Earlier that day the difference between winning and losing in the FX market was a 7 pips. That is what stood between our position and our stop as we were short GBPUSD going into UK Retail Sales. We turned out to be absolutely correct in our analysis, but pre-release the market had other ideas and rallied the pair to within a whisker of our stop. Once the news broke, the pair tumbled and we were able to bank 70 points in just a couple of hours – the best trade of the week.

Yet imagine if the trade was stopped out for –60. How many of you would have followed us into short USDCAD trade just a few hours later that netted another 47 points of profit? So a mere 7 points separated a 117 profit day from a –60 loss day as swing of 167 points.

In his acclaimed documentary “The Thin Blue Line” filmmaker Earl Morris examines the sometimes tenuous connection between crime and justice as he tells story of a wrongly convicted man and shows the often subjective and random events that can lead us to the wrong conclusions. The same phenomenon exists in trading where I call it the Thin Green Line. In trading, just as in life the difference between success and failure can literally be 7 measly pips. That is why good traders never allow their successes to go to their heads, nor allow their failures to destroy them.

Nothing illustrates the point of the Thin Green Line better than the story of Marty “Buzzy” Schwartz, told in his best selling auto-biography titled “Pit Bull”. After spending years on Wall Street as analyst, Marty Schwartz finally managed to put together a small grubstake, buy himself a seat on the American Stock exchange and become a floor trader, back in 1970’s. He had a total of $30,000 in trading capital to his name and he bet fully a third of it on an options position that he was certain would rise. Unfortunately the options declined. He bought more and they declined more. Within two days of starting his trading career, Marty Schwartz had sunk half his capital into a deteriorating asset and was in danger of blowing out after working for years to achieve his dream. Fortunately, the options regained value, then rallied and Marty Schawtz was on his way to becoming the greatest individual trader of the 1980’s making tens of millions of dollars in the S&P 500 futures pit. But who on that fateful day, as he sat on a bench at the cemetery near the American Stock Exchange contemplating his losing position would have predicted that Marty Schwartz would be come one of the greatest traders of all time?

It’s critical to be aware of the Thin Green Line in trading and to take both your wins and your loses in stride. In the long run taking losses well will serve you far better than taking profits. Profits are the gifts the market. They are easy and require little work. Losses on the other hand require tremendous amount of discipline and skill. That why at bkforexadvisor we don’t brag about our wins, but instead assiduously focus on improving our losses.

While loss taking is crucial, they key of course is to minimize their impact. That’s why you may have noticed that over the past few weeks we moved almost exclusively to a proactive model of trading. Why? Because when we trade proactively we often enjoy an asymmetrical risk to reward situation. When we are a correct in our analysis, the trade often goes to our T1 target and frequently moves to within a few pips of T2. When we are wrong (the news is different from what we expected), we instantly abandon the trade often saving ourselves further losses.

Take a look at this week. On the two trades where we were wrong (Long EURUSD and Short CADJPY) we busted out as soon as we heard the news and lost a mere –10 points on each position. On the other hand on the trades where we were correct (Long EURUSD, Short GBPUSD, Short GBPUSD, Short GBPUSD yet again and Short USDCAD) we made 25, 36, 44, 70 and 47 points respectively. In fact the only bad trade of the week was a reactive trade we took in USDJPY that cost us –70 and we will be very careful not to repeat that mistake again.

The proactive model also carries another advantage. It allows us to provide you a with game plan our trading ideas, so that you do not constantly have to sit by the computer awaiting the signals. This week K started emailing our daily “Trading Plan for the Next 15 Hours” and we hope you find this approach more useful and user friendly.

Next week, Monday and Tuesday the calendar is barren of event risk, but from Wednesday onward we expect to be very busy with trading so we hope you will join us then. We will send our Trading plans ahead of time as usual.

In the meantime, for those of you in New York we would like to let you know that we will be at the www.fxcmexpo.com at the Hilton all day today, so please come by if you can and say hello.

As always,

Wishing you all the best

B&K

Lucky You

"I'd rather be lucky than good." Yogi Berra

In trading as in life luck can be such an ephemeral thing. This week it truly tested our patience first taking us out of the long AUDUSD trade at the absolute low tick of the night only to rally higher and hit both of our profit targets and if that wasn’t bad enough we covered our short NZDUSD trade for a minuscule –8 loss only to see the pair plummet nearly 100 points over the next 12 hours.

But despite those setbacks, I heartily disagree with the great Mr. Berra on the point of luck. Luck always changes, but skill stays. No doubt, luck plays a large part in everything we do, and we should certainly appreciate its occasional gifts, but to rely on it is a mistake. It abnegates you of the responsibility to honestly face your choices and do something positive to change them. Much as its tempting in trading to cry and complain about the turns of fate, it is a game for amateurs. Pros know that luck is a capricious mistress. It will be with you one week and gone the next. Putting your faith in luck is ultimately a sucker bet.

Last weekend I saw an altogether forgettable movie called “Lucky You”, mainly because since Munich I have become a big Eric Bana fan. Mr. Bana plays a professional poker player - man of consummate skill - but one that likes to push his luck to the limit. In poker parlance, he is known as “a blaster”, a guy who takes enormous chances with his money. The net result is that while highly talented player, Mr. Bana’s character is a perennial loser until the time he learns to respect risk and curb his gambling impulses. While this movie will never win an Oscar, it does offer a valuable lesson to traders – over the long haul skill is almost always wins out over luck.

How many us remember the thousands of baby faced day trading millionaires during the go-go stock market of the late 1990’s? How many of them kept their money? The guys who survived were the careful traders who grounded it out in the markets every day. These guys never let the market take control over their account. The never reached a point where the only thing they could rely on was luck.

Yet perhaps the most important lesson this week had less to do with luck then risk involving a trade we did not take. Watching the horrid same store sales data trickle in from US retailers all week long, K and I both agreed to get short dollars ahead of the US Retail Sales number on Friday, but at the last minute I called her and said that I was pulling the trade because I felt the sentiment had been so dollar bearish that a chance of a negative surprise had diminished considerably.

“You are letting price action dictate your thinking,” K told me sounding a bit exasperated. I disagreed, but couldn’t offer any truly viable objection to the trade. Nevertheless, K respected my wishes and we passed on the long EURUSD

Ironically enough we were both right for a few moments after the news came out. The number printed worse than expected just as we thought it would, but the initial price action was not euro bullish because much as I suspected, sentiment was skewed too much against the dollar. Nevertheless, the trade did ultimately move our way and using out standard T1/T2 methodology would have probably netted us a modest 20 points.

However, K was absolutely right to criticize me. I had no objective reason to negate the trade except for “feel” and as she properly reminded me, “You are never as rational about the trade as before you enter it. Once you are on the cusp of entry or in the trade already, you lose much of your objectivity and let feelings take over.”

More importantly, she made me realize perhaps the single most important insight into trading.

As traders we only get PAID WHEN WE ASSUME RISK. We can not avoid it. We can only minimize it through stops.

If you do not want to assume risk, don’t trade. By trying to precisely handicap the EURUSD trade, I did what so many traders often do, I tried to be perfect and to eliminate risk altogether and of course you cannot do that, because a no risk trade would have no reward. There is ALWAYS risk in trading and we should embrace it rather than run away from it. Don’t be afraid to take the trade, but don’t count on luck to make that trade profitable.

This is Mother’s day weekend, so both of us are busy with our families and therefore the newsletter will be a bit abbreviated today. Nevertheless, we have a slew of great trade ideas lined up next week and look forward to sharing them with you.

Buy all your moms chocolate and flowers and have a great week-end,

We’ll talk to you next week

B & K

Visit us at www.bkforexadvisor.com

Thursday morning as we were nursing our EURUSD short trade after it hit our T1 target, K sat transfixed as prices on the pair kept falling pushing the trade further into profit for us. The key event risk – the US ISM services report - which we had been anticipating to be dollar bullish had not yet occurred, but the market seemed to have sensed that the numbers would be good and kept selling the EURUSD even before the news printed.

“ I know that this is not the right thing to do, “ K announced, finally pulling away from the screen, “ but I am moving the stop from breakeven to T1.” She was afraid that by tightening the stop from its current position at 1.3613 to the take profit level of our 1^st target as 1.3593 we would be vulnerable to a sudden spike in price that would take us out with small profits only to see the pair collapse once the news came out.

“There is no ‘right thing’ in this case, “ I said to her, “only the ‘proper thing’. Go ahead.” K nodded in agreement and sent out the alert to move the stops. As it turned out, prices did not retrace, the news printed our way and we closed the trade within a few pips of our T2 target for a nice tidy profit of 74 points. But even if the events occurred just as K had feared and we would have been stopped out with only a 40 point gain on the trade, her actions would have been correct.

Why? Because all profits are illusory until they are actually realized. During the dot com boom when I as a headhunter I was negotiating seven figure compensation deals for computer software salesmen at such high flying high tech companies as Vignette, I2 and Autonomy, I once calculated that the total value of the stock holdings of these deals exceeded $35 million. Yet how many of my former clients became millionaires as result of the boom? Only one. Only one was disciplined enough to sell out his position the moment it became vested. The rest held out, wanting more and more money only to ultimately end up with nothing.

Last year, I remember sitting at swanky street café in Delray Beach Florida across from a gentleman who regaled me with tales of his prowess in the housing market. As the afternoon sun warmed our backs and we sipped our overprices iced lattes, the man calmly explained to me how he was able to leverage gains from one house into a portfolio of 11 residential properties on which he was holding mortgages. I cautioned him that his net worth was dangerously tied up in a parabolic asset and that he was vulnerable to a sell off. He assured me that he was cashflow positive on all his houses and had nothing to worry about. We’ve lost touch, but I wonder how he is doing now, given the fact that all of those cheap ARM loans are about to reset on him and that those properties are now worth 20% less.

Mark Cook, one of the traders from Stock Market Wizards used to say that buying option contracts was like holding ice cubes in you hand. The longer you held them, the faster they melted. I always thought that was a great analogy for trading. Investors may “buy and hold” successfully (though those who bought Nasdaq 5000 or Nikkei 38,000 would vehemently disagree with that statement) but traders need to always protect themselves from risk. As traders we never ever, know what is in front of us. We only know what is behind us. Therefore minimizing risk is the only way we can stay alive in the game. Profits are always a function of luck, but losses are a matter of skill.

At the same time we must never forget that reward only comes if you are willing to take the risk. The short EURCHF trade that we put on Thursday night is a perfect illustration of this point. We made the trade after Swiss CPI data printed much hotter than expected reaching 15 year highs. The news spurred speculation that the SNB may raise rates 50bp rather 25bp in June. Therefore, EURCHF - which up to that point had been setting record highs on a daily basis as carry traders continued to mercilessly sell the Swissie - was due for a correction. Unfortunately after inching a few pips our way the trade stalled and bounced up and own for 24 hours as the market tried to assess the probability of the SNB hikes. Much as it pained us to watch the trade creep towards our stop level, we held tight. The fundamental factors for our trade did not change and until and unless the technical stop level was broken, there was no reason to abandon the trade. By Friday afternoon our patience was rewarded and the trade moved down to our T1 level generating 20 points of profit. Yet just as in the EURUSD example, even if the trade went against us and stopped us out, the decision to stay in was proper. As we wrote last week, the most important aspect of trading is to always know the reason for getting into the trade and the reason for getting out.

We’ve had a remarkable run over the past two weeks hitting 8 out of 10 winners while banking 248 points of profit. Yet we are not foolish or arrogant enough to claim some secret of success. We’ve simply stayed disciplined and tried to practice what we preach. We’ll continue to work very hard to generate high quality trading ideas for you and hope that you will benefit from our experiment in “reality based trading”.

Now a quick review of the other trades this week.

Short EURUSD –12

This was the first trade of the week, based on the assumption that German Retail Sales would be good. We were badly mistaken and bailed instantly before the stops eventually got hit. This is a perfect example of NOT waiting for your stops if the reason for your trade failed. In this case quick reaction saved us from additional unnecessary losses.

Short USDJPY +20

Another trade that tortured us for 12 hours, but we hung in there since the fundamental reason for the trade – the weakness in the US equity market - remained true. We hit T1 and were then taken out at breakeven on rest. This was a good example of our T1/T2 strategy. The strategy gave us profits and then protected our capital when US stocks firmed once again and USDJPY rallied.

Short EURUSD+ 35

Long GBPUSD +32

Both of these trades were the result of good defensive trading. In the short euro case we accurately caught the continuation of the move from the NY session, but then by constantly lowering our stops and locking in profits were able to collect decent profits. Had we not done so, we would have been taken out of the trade with minimal gains as the euro reversed course.

In the case of the pound, we traded the UK PMI construction data, which proved to be higher than forecast, but as we wrote in the aftermath of the release, ”UK Data did print better expected but mortgage approvals were a the lowest level this year so we are going to take T2 here at market 1.9947 (+17) for +32 on the whole trade.” Cable collapsed soon thereafter and this trade showed why trading is and will always be a matter of art rather science requiring nuance and constant flexibility.

We hope you have a great week-end.

As always watch for an email from K on Monday regarding our outlook for next week.

Wishing you best,

B & K