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

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