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

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

posted by BKTrader  # 5/14/2007 04:39:00 AM