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

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