A Fusion of Fact and Feeling

What a crazy, crazy week! It started with a release that didn’t materialize and ended with a false print on Bloomberg that made us exit a trade early. In between we made money on data that printed completely opposite of our expectations while lost money on data that printed exactly as we forecast.

Let’s just recount the absurdity in full detail.

On Sunday we traded Australian :LEI data, but guess what? At the very last moment the report was pulled from the calendar, delayed for no stated reason and we scrambled to get out before the AUDUSD long hit our stop.

On Monday we traded the NZDUSD surmising correctly that the Trade Balance would be weak. However, the kiwi showed no reaction to the news and we exited 15 minutes later only to watch the unit fall apart all night long as hawkish commentary from BOJ officials triggered a round of carry trade liquidation.

On Tuesday we traded the KOF which was the only “normal” release of the week, as the data failed to meet our forecasts and we exited the trade at scratch.

On Wednesday we traded the Durable Goods orders and couldn’t have been more wrong on our call but managed to bank 14 points on the trade nevertheless as pre-release price action went our way.

On Thursday we traded CAD Raw materials data and banked 56 points even though the data was much cooler than we projected. Merger and acquisition demand for Canadian companies trumped all other factors that day and gave us the best winner of the week.

Finally Friday the NZD GDP which we thought might beat simply matched the relatively strong expectations and according to our rules we exited the trade with a tiny 4 point loss before it fluttered 25 points lower.

But perhaps the strangest trade of the week came in the middle of the night on Friday. We traded the UK GFK Consumer confidence survey which we expected the be worse than the –3 expected. The release was due at 5:30 AM EST. Suddenly at 5:15 AM EST Bloomberg printed the number as +2. We immediately send out an alert to exit at scratch. At about 5:29 AM EST Bloomberg took the +2 print off the screen and posted a reading of –3. The GBPUSD did not react either way and in retrospect our exit was fortunate as GBPUSD eventually rose materially for the rest of the day.

The net takeaway from all of these misadventures is that if you are not willing to suffer the folly of human foibles don’t trade. Governments will pull releases, news agencies will post false readings, traders may not react to the news as intended. This is all part of the “reality based” trading that we share with you every week. If you want the precision of a profession such as electrical engineering don’t trade. Trading is about feelings first and facts second. That is why we focus so keenly on risk control. Markets are always chaotic and will remain unpredictable in ways no one can ever imagine, but our response to them as traders does not have to be impulsive. It is not the trade that matters in trading, its our reaction to it.

Thus despite the trials and tribulations of the week we are up 36 points and up 138 points for the month of June. More importantly since the start of May when we went full time to our event risk model we are up 493 points with the largest drawdown of 155 points meaning that we’ve earned about 5 dollars of profit for 1.5 dollars of risk. While there is absolutely no guarantee that such favorable odds will continue, it does show that this method of trading is robust and certainly validates our risk control approach.

Next week is July 4^th – we’ll be off that day, but the rest of the week will busy and we look forward to having you join us in our trades.

Have a great week-end

B&K

posted by BKTrader  # 6/30/2007 09:37:00 AM 0 comments

We continue to attract many news subscribers and bring back some of the old ones all of which has resulted in serious misunderstanding of our trading style and trading record, so I thought this week I would reprint a few emails from the past several days to clarify the issues once and for all.

Dear B & K ~

Is there a track record showing gross and net total wins and losses over an extended period of time?

If you are netting 200+ pips in profit a month that looks pretty good, unless your gross total of trades reflects losses greater than the wins on record.

Listen, I am not someone who likes to be the gad-fly. It's not my strongest card in the deck nor is it something that anyone wants to do. It's just that doing one's due diligence is critical when it comes to this business and should therefore be seen as part of one's business plan. Nothing personal, only rational. So please understand the motivation for this inquiry. It's not motivated by some need to find things wrong with the system. In fact, the questions come up in real time and are based on observations that beg to be clarified..that's all. So, hopefully you can see this from my point-of-view.

To our long-term success and happiness... and, by the way, have a happy summer solstice.

My answer below

All our trades are net in the trade record. We do not hold any floating losses off the books.

Let me just explain this further. Some signal services will issues hundreds of trade recommendations with no stops or very wide stops of 1000 points of more. They will then book profits on trades that are successful but let the bad trades simply float on the account without recognizing those losses. So the next effect is that they will claim WE MADE 800 POINTS THIS MONTH, but neglect to tell you that if followed all of their recommendations you may also be floating 6000 points in losses on the books. Let me reiterate at BK we never do that. The record you see on the website is based on all of our trades, which are all closed out typically no more than 3 hours after we initiate them. Therefore the numbers you see are actual results of the recommendations, there are no hidden “off the books” trades ever.

In our calling all past members we’ve had this comment come up a few times – “I thought it was dishonest for them to count their losses with one lot when their advice was to always buy 2 lots”

That is not correct is it? How would you guys respond to that?

My answer below

Absolutely false, All losses are counted as 2 lots in the record.

K’s answer:

We don’t do that. We ALWAYS double count losses on our track record. If you go through the track record of closed trades- you can clearly see that. Only counting one loss is something that we are adamantly against and we pride ourselves on honesty. The -40 or -56 etc are all the additions of 2 lots since our stop is usually 20-30 pips away from our entry.

I hope that clarifies this issue, but just for the record from now on we will make sure to ALWAYS include the total 2 lot loss in our exit emails. As you can see we do that without fail in our track record, but occasionally in the heat of the moment as I am scrambling to send out a get out email I may forget to multiply by two in the email (I am notoriously bad typist and the task of typing quickly and multi[lying at the same time eludes me- my apologies - and I will make sure to correct that in all future correspondence.)

Finally I want to conclude this weekly with response that K wrote about our track record – most specifically why the results over the past 7 weeks have been so radically better than the prior 4 months. Her words say it best so I am just going to quote her.

This is a very active trading service and our forte is anticipating news. Typically you will get 5-8 trading alerts each week (more than the rep indicated), some during US hours, some during European or Asian hours. Every day, we send out our trading plan for the next 24 hours with specific times that we will be placing trades - so that you can plan accordingly and will never be surprised. The holding period for the trades is very short - so you should only subscribe if you can be an active trader. We send our alerts out in SMS, email and chat room format with audible alert, so hopefully one those if not all will work for you.

Our goal is to average 200 pips per month. We moved to this trading style in on May 1, which is why the rep stated that these are the most reliable results. During that time, we have made 56 trades. In those 8 weeks, we have only had 2 negative weeks. The biggest weekly loss was 117 pips, the biggest gain was 161 pips. Since we moved to this model, we are up 477 pips. The reason why we trade so much during the week is because you never know which piece of data will be the big surprise. We look for a few small winners, and even smaller losers or scratch trades and then maybe 1 or 2 big winners each week.

More specifically on performance:

So far in June, we are up 92 pips,

In May, we were up 385 pips

Between Jan and April - we were trading differently, sometimes the strategy worked, sometimes it didn’t and we realized that it wasn’t consistently replicable. In the new model, each trade is independent of the last, which means that we wont be trying to fight a trend trade after trade after trade. Instead, our analysis of economic data and our directional call is not sensitive to whether the market is range trading or trending.

In April we lost 329 pips, in March 116, in Feb we made 169 pips and in Jan we made 31 pips.

Since the beginning of the year, we are up 232 pips.

Our new model assures that the performance is far closer to the May and June results than the Jan to April results. The best way to see this yourself is to trial the service. If we do not deliver the results that we expect, you can always cancel with no obligation or fees.

I hope this answers your questions regarding BK. We greatly value your interest in our service as you join us in our “reality based” trading tour. Please feel to write us anytime.

Have a great week-end.

B&K

posted by BKTrader  # 6/23/2007 08:42:00 AM 0 comments

Q and A with B&K

Over the past month we’ve had a number of new subscribers with varying degrees of expertise in trading the foreign exchange market join the BKForexAdvisor service so we thought we would take this opportunity to answer some of the more common questions directed to us in the hope that they may provide you with the information you seek.

Q, What is your trading approach?

A. We trade event risk. What does that mean? Every day the global economic calendar carries numerous economic releases and events. Often but not always these events have direct relationship on price of the currency we trade especially if the data surprises the market. It is our job to try to analyze these events and ascertain which ones have the best possibility of a positive or a negative surprise. Are we always right? Not even close. In fact we can be wrong more often than right and we can be wrong in two ways:

1. We can be wrong about the outcome of the data
2. We can be right about the data, but the price does not go our way.

So how do we make money? Because in trading as in life the key to success isn’t how many times you are right or wrong but what you do about it. We are extremely disciplined about cutting out losses short while trying to let our profits run. This is a very tried cliché in trading – but it is a cliché for a very good reason – it is absolutely 100% true. However, although the idea of keeping losses small and profits large may sound simple it is extremely hard to implement which brings us to the next question.

Q. How do you trade?

A. We always trade with two units in every trade. In the retail FX market transaction sizes are uniform. You can trade mini-lots which are comprised of 10,000 units of currency or you can trade standard lots which are comprised of 100,000 units of currency. When we trade we always trade in multiple of two lots. The actual size amount is totally dependent on the risk tolerance and size of the subscriber’s account. We have some subscribers that trade two mini-lots on each trade representing 20,000 notional units of a currency and other subscribers that may trade 20 standard lots per trade representing 2 million notional units of currency.

Why always two units? Because as we said the idea of letting your profits run is a lot easier said than done. When you are in a trade that is making you money and it suddenly moves a few pips against you the temptation to get out is overwhelming. The end result is that most traders take their profits too early. In fact the single biggest reason that most traders lose money is that they let their losses run but cut their profits short. Therefore in order to solve this problem we trade with two unit and two targets. Here is how all of our trading instructions are done. Lets take a look at a recent trade in the Australian Dollar:

BKForexAdvisor.com
News from the Desks of Boris and Kathy
6/5/2007, AUD/USD, Long
Tuesday, June 05, 2007 EMAIL TIME: 7:35:18 PM EST
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Dear btrader@gmail.com,

Long AUDUSD at market 0.8372

(We always enter at market. This is simply a reference price. Your prices may be better or worse depending on what broker you use and when you enter the order. Generally we try to enter during the quiet times in the market and most of the trade fills are one or two pips either way of our entry price. Way too many of you worry about missing the entry by a couple pips instead of focusing on the trade. Entries are the least important par of the trade. Exits are what matters. That having been said if you are consistently coming at 10 pips worse then our entry price, then you should change your broker. You can look on www.fxstreet.com for a listing of all the retail FX brokers out there.)

Stop 0.8350

(Unlike entries STOPS are fixed. While everyone may have different entry price, the stop must be the same. Stops are placed for a reason – usually a key technical point which if violated means that the trade is clearly wrong. That why you should set your stop at the point of where we specify it)

T1 0.8393

(T1 stands for target 1 and it is set close to our entry price. We always want to achieve a realistic profit on the first half of our position and then move to breakeven on the rest of the trade. This is the only way that we can allow our profits to run. By taking some money off the table we alleviate the psychological pressure of minute by minute fluctuations in price because once we make T1 we are trading with the “markets money” and can stay in the trade longer to see if it will work out our way. Additionally we always go to breakeven on the rest of the position because we never let a winner turn into a loser.

T2 0.8448

(T2 stands for target 2 and it is set far away from our entry price. We try to make it 2 or 3 times our risk. So that if we risk 20 points on the trade we try to make 60 points on T2. Although we certainly don’t make T2 on every we trade, if we reach our T2 target just once or twice a week we are able to offset many of the small losses and make good profits. Those of you who run your own business or are in sales know that 80% of all profits comes from 20% of your best customers. The same holds true for trading.)

A couple of other points. If the data does not print to our expectations we will exit the trade instantly without waiting for our stops to be hit. This at times creates several red “nicks” on our record as we sometimes post –10, - 5, -12 in row. However, this is a key to our success because it creates a highly favorable asymmetrical environment for our trade where our losses are tiny and require only one moderate win to put us back in overall profit. So when you evaluate the service you should never do it on a single trade basis but rather follow us for at least a month after we have produced at least 20-25 trades and you have a good sample size to judge us. That’s why we offer you 30 day free trial basis. This brings us to yet another common question.

Q. Why do you trade so often?

We believe that after 48 hours of any point in time the price action in the currency market is essentially random and subject to huge errors in prognosis. Just at it is easier to predict the weather 5 minutes forward rather than 5 days forward, the same holds true for trading. Furthermore, if we traded on a longer time horizon our risk would have to be much larger with stops of a 150 points or more. Since we started trading this model exclusively in the middle of April we’ve generated 395 points of profit against a maximum drawdown of about 110 point. That means for every $4 of profit we’ve only incurred $1 of risk. If we traded longer term and hit three losing trades in a row we would then subject you to a possible 600 points of loss and we feel that would be way too much risk to absorb. As you can see, unlike many advisory services who promise you the world, we trade for real and as reality based traders we are always much more concerned about managing risk since that is the only component of the trade that we can truly control.

Q. I missed the trade alert in my email. Why the f@##$$ did that happen?

A. We hear you. Bottom line is that email is woefully unreliable. We use an industrial size server and even that software occasionally has glitches. That why we have developed a very specific protocol to make sure you can always get our messages. We issue alerts through 4 different channels. This way if one channel fails you can always get the information another way. All our alerts go into:

1. Email
2. SMS – direct to your cell phone (please contact support to sign up if you haven’t yet)
3. The Website! That’s right the moment the alert is printed it is on the front page of the website at www.bkforexadvisor.com. So please check there first!
4. The Chat Room. The chat room is located at http://www.bkforexadvisor.com/members/tradealerts.aspx

Please get a username and password and join us there about an hour ahead of the trade event. We will post there right away

So now that you know about all of our communication methods you should be able to follow our alerts even if email fails.

We hope you found this Q&A useful and we will do more in the future if you like. Next week Monday is quiet but look for our Trade Plan starting Tuesday as we get back into action

Have a great week-end

B&K

posted by BKTrader  # 6/18/2007 02:43:00 AM 0 comments

You find out that life is just a game of inches.
So is football.
Because in either game
life or football
the margin for error is so small.
I mean
one half step too late or to early
you don't quite make it.
One half second too slow or too fast
and you don't quite catch it.
The inches we need are everywhere around us.
They are in ever break of the game
every minute, every second.

Al Pacino Any Given Sunday

Every summer K and I get a bunch of interns to help us on the dailyfx desk. Typically these are very smart boys and girls from NYU, Columbia, Harvard and a slew of other top notch schools who come to us wide eyed and bushy tailed knowing nothing about the financial markets except the fantasy that they learned from the econ 101 text books. One of the great aspects about dailyfx is that unlike the big investment and money center banks we have a very informal, collegiate atmosphere that encourages these kids to experiment and ask us any question they like.

Many of them learn more in three months with us than they do in a year with larger investment houses who typically relegate them to do nothing but run thousands of what-if tests on Excel. In fact, several of my interns from prior years are now on the desks at Lehman, UBS and BoA. However, when they first come through the door it is always amusing to see their initial reactions to the market. Perhaps the most common question that we always hear is “How come the currency went down if the data was good? It doesn’t make any sense!”

No Virgnia, markets often don’t make any sense. No one understood that fact better then the greatest economist and trader of all time John Maynard Keynes. Yes, that’s right I said trader and economist. Some of you may not know that during the depths of Great Depression, in addition to writing his seminal work on economics, Keynes successfully ran his schools endowment fund. According to www.maynardkeynes.org. “Keynes spent half an hour each day on stock market research - in the morning, still in bed - studying company reports, reading the financial sections of the newspapers and speaking to his various brokers by telephone.

The Chest’s initial capital was £30,000. By the time Keynes died in 1946 the fund had grown to £380,000 - an annual compounding rate of just over 12 percent. This might not seem very remarkable but for the facts that:

• This performance was achieved during a period that encompassed both the crash of 1929 and the build up to World War Two, both of which proved disastrous for British stocks.
• In the same period of time, the British stock market fell 15 percent.
• The growth in the value of the Chest Fund was entirely due to capital appreciation. There was no dividend reinvestment because Keynes spent all of the dividends on the college. He believed the fund was there to provide money for the college and was scornful of the way other Cambridge colleges managed their finances, referring to them as ‘savings banks’.”

So unlike many of his peers and colleagues, Keynes actually walked the walk and proved the value of his ideas not just in theory but in real life as well. And the cornerstone of those ideas is that markets are psychological not logical in nature. It other words Keynes well understood that prices move on investors feelings about the data, rather than the data itself. It does not matter how good or bad the news is, if the market does not want to respond to it, it won’t. This is something that our interns – at least the good ones – begin to appreciate the longer they sit on the desk.

Furthermore, trading like life is indeed a game of inches, even if you are right on the idea, you may not be always correct on your entry. Nowhere was this more evident than in the EURUSD trade at the end of the week. We were dead on in our assessment of the US Trade Balance figures, but unfortunately were taken out of the trade before the news even printed. This is part of the game and will almost certainly happen again. The important thing to keep in mind is that we controlled our risk and ended the week with 64 more points than we started. Just like any other professionals we measure our success one week, one day, one trade at a time and continue to inch forward with positive returns. We hope you find our approach of some value.

For those who would like to find out our latest take on the markets you can see my latest interview on ForexTV here. http://www.forextv.com/FT/Video.jsp?movieid=30883&channel=41

Next week will be extraordinarily busy with as many as ten trades between Monday and Thursday. Remember, you do not have to take them ALL! The trades will come during Asian, European and US hours so all of our subscribers across the world will be able to receive new ideas.

Have a great week-end

B&K

posted by BKTrader  # 6/09/2007 11:03:00 AM 0 comments

I refuse to have cable TV, but being a trader my apartment is of course littered with flat panel TV screens and so about a year ago I gave in and started to download TV shows from iTunes and have now built a pretty decent library of all the Lost, 24 and House episodes. Aside from the standard entertainment fare I also love anything from the History and Discovery channels finding that the insights from ancient civilizations can offer very valuable lessons to my own life.

My most recent viewing involved the story of the ancient civilization of Atlantis and it was truly an eye opening experience. Most of us are least somewhat familiar with the myth of Atlantis – the magical and advanced civilization that existed thousands of years ago. Plato described its riches and sophistication in his writings, but until recently modern science and archeology have had little direct evidence that it existed. But with the discovery of ancient ruins on the Mediterranean islands of Crete and Santorini off the coast of Greece archeologists are now convinced that the great Minoan civilization may have been the actual foundation for the Atlantis myth,

The accomplishments of these people were astonishing. More than 3,500 years ago they were able to build multi-story buildings with indoor plumbing, hot and cold running water, earthquake-proof walls, indoor ventilation and lighting systems and a host of other innovations that would not be replicated for several more millennia. Looking at the remnants of the walls of the palace on the island Crete one cannot but be impressed by their modernity of it all. We can only shake our heads in awe at the appreciation of man’s instinct for engineering.

The Minoan civilization came to a sudden and tragic end when the greatest volcanic eruption in the history of mankind blew apart the island of Santorini and destroyed Crete as well by sending hundreds of tidal waves in the Mediterranean sea that literally drowned most of the inhabitants. The volcanic ash then sealed and protected the remains from the elements for thousands of years, which is how we now know so much about these incredible people. However, despite their inauspicious demise, the spirit of Atlantis lives on. The human desire to corral and control the untamed nature around us and shape it into a functional and predictable environment was never as well or as strongly expressed as by those ancient inhabitants of Crete and Santorini.

Unfortunately that same human instinct for engineering can often get us into trouble when we trade the markets. Unlike the physical world, the markets simply don’t lend themselves to reason and rationality, In the currency market the essence of what we trade is sentiment and sentiment can change on a dime. That’s why all efforts to create systematic, predictable, non-volatile returns fail miserably in the end. To prove that point we only need to go back to the demise of Long Term Capital – the hedge fund with multiple Nobel prize winners on its staff that incinerated years of profits in a matter of months. Or we can simply look at this week’s news to see that the venerable John Henry – the owner of Red Sox and the famed trend following systematic hedge fund manager -has managed to lose more than 35% of investors capital this year. Markets are not logical, they are psychological. You cannot engineer a profit and predictability. If you want to succeed as a trader you have to prepare for the unexpected every day of every week of every year and not get discouraged when it occurs.

Nowhere was the sense of unpredictability more evident than in our trading this week. Events that we handicapped correctly did not our way, events that we were wrong about sometimes did as data was often inconclusive and the market’s reaction even more so. Despite the lack of clarity we were able to bank 34 points for the week as we took advantage of the few trades that went our way and quickly terminated those trades that did not.

For example in the case of our Aussie Retail Sales and Trade Balance trades we blew out right away when the data did not meet our expectations and did the same with the UK PMI and German Retail Sales which printed completely opposite of what we forecast. Taking those small losses proved very wise as price continued unabated against us for the rest of the day and would have resulted in far greater losses if we stayed in those trades. On the other hand were able to catch the Canadian dollar both up and down and harvested 70 points of profit in the process.

So they key for everyone to remember is that markets will always be unpredictable. You will never be able to consistently engineer a profit, but you do have the power to take a disciplined loss and in the end that is the only control you have. This is the one lesson that we hope you learn from your journey with us on this reality based trading experience tour.

Have a great week-end. We’ll be back on Monday with new trade ideas.

B&K

posted by BKTrader  # 6/02/2007 08:19:00 AM 0 comments