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

“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