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

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