A Longer Perspective

Ever since we started Bkforexadvisor we’ve had requests for longer term trade ideas. That’s very understandable given our intense, short term orientation towards the FX market. Many subscribers found it difficult to follow all our trade ideas since they are issued round the clock 5 days per week. Despite the fact that our trading style probably has the shortest exposure to market risk of any FX newsletter (since the majority of our trades last no more than 30 minutes), the need to be in front of the computer to trade each specific event risk can be difficult for subscribers situated across the globe.

Over the past few weeks we’ve made several improvements in terms of delivery of signals by initiating positions only 15 minutes before the event (thus minimizing the impact of negative drift) and posting everything in the chat room first allowing for much better reaction time to the news. For those of you still not familiar with the chat room please note that its is the black button on the front of the www.bkforexadvisor.com that says Instant Trade Alerts. The direct link is http://www.bkforexadvisor.com/members/tradealerts.aspx and we highly recommend that you check it out if you haven’t done so already.

In any event we’ve received overwhelmingly positive response from those of you who’ve adopted the new features, but these improvements all revolve around our short term event risk model and didn’t address your requests for more longer term, less intense trade ideas. Well you will be happy to know that we took your suggestions seriously and over the past several months Kathy and I have been busy beta testing a longer term trade model that we believe to satisfy these requests. The model is a proprietary combination of technical and fundamental variables that tries to exploit reversals as well continuations of trend.

As always we will try to be as transparent as possible in providing reasons for various trades. In fact the single greatest compliment we’ve recently received on our service came from a gentleman at Dallas expo who told us that unlike all the other investment advisory services he has ever tried, we were the only one who provided clear well thought and easy to understand arguments for our positions. This is our greatest strength. Instead of just telling you buy X here, sell X there we always provide context and reason for why we are doing something. Win, lose or draw you always know WHY we are trading. Our most ardent subscribers truly appreciate that fact as they can evaluate each trade on its merits rather than just being forced to blindly follow every signal.

As you can imagine the long term trades ideas will very different from short term signals and its very important for you to understand the difference.

1. Leverage.

We do not recommend any specific amount of leverage for our trades since each person’s risk tolerance is unique. However, it is important to note that the long term trade ideas will have much wider stops because we will looking for very different risk and reward parameters. In our present short term model we generally do not allow more than 40 points of risk, In the long term signals the stops will be between 100-200 points so please lower your leverage accordingly to make sure you are not assuming a disproportionate level of risk for you profile.

2. Size

In our short term model we trade with two units initially and exit the first half of our position at 1 times risk, then go to breakeven on the rest of the position and try to make 2-3 times risk on the second half. The long term model will use a very different money management approach. We will always enter the trade with 1 unit and may occasionally ADD to the position if our initial entry moves deep into profit territory. We will never scale down into a trade by adding to a loser, but may at times scale up by adding to a winner.

3. Timing

The alerts will be issued at 5 PM EST (22:00 GMT) after the close of the New York session and the trades will generally last between 2-10 days depending on the price action of the market

4. Frequency

The model typically generates 1 or 2 trade idea per week, but there are some weeks when price action may be so quiet that we may not do any long term trades at all. Our goal is to select the best possible ideas and sometimes that simply means that we will be sidelined

5. Demarcation

We will clearly label the long term trade ideas in our emails, so that you will be properly informed on the type of trade you are receiving and can make your own judgments as to the recommendation. We will also mark the long term trade ideas with an LT prefix in the all trades page and will keep a separate tabulation since this is a different model with different trading goals.

Finally for those of you preferring the short term approach with much tighter risk parameters rest assured that we will continue to send out event risk trading ideas. In fact we have a full slate for next week. However, by offering the longer time frame signals we hope to address the overwhelming demand for this type of trading and provide an even richer array of services for our subscribers.

Have a great week-end

B&K

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Variation on the Theme

This week, to an overwhelmingly positive response we changed our entry procedures to eliminate as much of the negative drift as possible. As many of you know we used to take positions as early as two hours ahead of event risk, in large part to accommodate the inevitable delays in email that plague communication on the Internet. During that time we enjoyed periods of positive drift (when prices would go our way before the event) as well as occasional negative drift (when they went against us). However when negative drift began taking us out of positions before news even printed the costs clearly started to outweighed the benefits and we changed our procedures.

Therein lies the first trading lesson of the day – adjust, adapt, evolve or die. Those of you who have been with us from the beginning know that we always show trading as it really is with all of its travails and challenges rather than as some imagined make believe get rich quick scheme. You have seen us adapt and refine ideas as market environment have changed because truly successful trading always requires creativity, and adaptability in order to survive and thrive in the game.

BK Advisor trades event risk. The operative word here is risk. We believe that you cannot achieve excess profits in the market unless you assume risk. This strategy is therefore highly speculative and should only be used with risk capital – money that you can easily afford to lose. In fact we always recommend that new subscribers follow the recommendations on a demo account. That why we offer a 30-day money back guarantee. During this time you can paper trade our signals to get an idea of how they operate and even more importantly to see how you yourself can best fine tune and adjust them to your own trading style.

Some of our longest running subscribers incorporate our ideas into their own trading strategy rather then use them robotically like a machine. As we’ve always stated trading is an art, not a science. Those looking for the “magic” formula will be always disappointed. It doesn’t exist and never will. Trading will never be mastered by engineering and profitable trades will never be erected with the speed and efficiency of skyscrapers in Shanghai. If that were possible. Goldman Sachs, Merrill Lynch and all the other major players in global finance would have long ago eliminated all the risk out of their trading operations and would have minted profits the way that McDonalds manufactures hamburgers. But as we’ve seen this week in the case of Bear Stearns whose CDO hedge funds lost all of their capital such is not the case.

In fact McDonalds and Merrill Lynch serve as good examples to better understand the difference between trading and all other business activities. There is almost no reasonable scenario (short of nuclear Armageddon) under which we can imagine McDonalds losing 10 Billion dollars in one day. Their model is the essence of precision, efficiency and repeatability that is constructed on natural laws of physics. On the other hand it is quite easy to imagine ML losing $10 Billion dollars in a day if the Dow dives 2,000 points in a matter of few hours. Furthermore it is not at all inconceivable that such an event could occur once every decade or so. That’s because trading is not based on a rock solid laws of nature, but rather on the ever shifting whims of man.

Those subscribers who understand the fluid nature of the markets and are creative with our trading ideas tend to enjoy the BK service more as they add their variations to theme. As one sub recently wrote us, “I view my subscription to your service as my long-term commitment to educating my self. Thanks for your great service.” Adding in another email, “The MOST valuable is your service is anticipating the news. I am a technical/system day trader and my net average between 300 to 500 pips monthly. I used to avoid trading around the time of economic news. Now with your service, I can trade around economic news with confidence.”

So in the spirit of stimulating more creative possibilities for our model here is an idea that comes from another subscriber. He writes, “The new way you work is nice because we can prepare and anticipate the trades If we enter just before the new release do you think that we can put a SL closer from the entry point (10-15 pips) because usually the direction doesn’t hesitate just after the new and we can benefit of the first spike. Thanks for your help and best rgds.”

This is an interesting idea. Let me discuss its merits and drawbacks. As you know our trading model depends on cutting loses quickly and letting a portion of our profits run. Anything that can minimize risk is therefore a positive factor. We put our stop at –20 as a fair compromise between mitigating risk and giving room for some pre-event volatility. After the news comes out we often exit way before the stop if the news is contrary to our position, posting the reaction in the chart room first . http://www.bkforexadvisor.com/members/tradealerts.aspx

Therefore, moving the stop to –10 or –15 one or two minutes before the event may not be a bad idea for some of you to consider. By doing so you have a tighter control on your risk without the trouble of manual exit. One caveat however. Occasionally the news release can create post-event volatility where price may initially spike against your position only to move in your direction after a few seconds. Thus if you lower your stops you must accept the fact that you may get taken out of what may ultimately prove to be a profitable trade and you must judge if the trade-off of smaller stops is worth the cost of the premature exit.

Trading is full of such trade-off. In fact trading is nothing more than a series of trade-offs and we can never know ahead of time if we make the right or the wrong decision. All we can do is control our risk and make adjustments as the market demands. Being flexible and creative is of the essence and we will try our hardest to be both as I will share with you more variations on our trading style in upcoming weekly emails.

Wishing you the best week-end.

Watch for a trade idea Sunday night!

B&K

Power Laws

I am writing this from Dallas Forth Worth airport as we are about to go back to New York after a great expo as Dallas where we had a chance to meet some of you in person. So this week’s missive will be brief but quite important.

The subject this week is power laws. For those you not familiar with this notion it can be best expressed in the well know example that in business 80% of profits come from only 20% of transactions. Many entrepreneurs or salespeople are probably shaking their head in agreement as they read this having seen this dynamic repeat itself over and over.

Yet while many people accept this fact in regular business, most novices somehow refuse to believe that power laws apply to trading. Everyone who starts out trading wants to achieve 80% profits and only 20% losses. As pleasant as that idea may be it’s utterly unrealistic. One can of course achieve such favorable ratios but only at the expense of suffering ruinous losses. In fact one can even record 99% accuracy in trading, by simply never taking any stops but the one wrong trade will wipe out all of your profits and all of your equity. History is littered with such examples and most recently investors into the subprime hedge funds of Bear Stearns learned that fact the hard way.

If traders could truly achieve 80% accuracy with minimal risk in their trades they would within a decade become trillionaires as such a powerful skew in odds would almost assure that they would be able to capture all of the profits in all of the financials markets of the world. In fact Jamie Saettele my technical analyst and I always smile at the naïve desires of most investors to look for a consistent track record. There isn’t a more dangerous investment to be made than one into a hedge fund that has had three winning years in a row. Inevitably those investments will experience losses rather than wins , because typically such steady returns are achieved through massive risk taking which is hidden from view.

Why do I bring up the idea of power laws this week? Because our trading approach very much follows those rules. We try to do the opposite of what is physiologically pleasing in order to achieve that which is financially prudent. In our journey for profits we will often take many small losers, but these losses will be overcome with only one or two winners. Instead of trying to please the psyche we try to adhere to the universal rules of power laws as we try to show you what reality based trading is really like.

That having been said our model this week, performed poorly, partly because the data simply did not go our way – something that is very much to be expected from time to time but also because of sub-optimal execution – something that can be definitely corrected. So let’s tackle the issues that we can correct and see what we can do better.

One of out vexing problems with trading event risk has been the lags in communication. Email is notoriously inconsistent in delivering messages on time. That was one of the reasons we used to issue our alerts an hour or two ahead of the event – in order to make sure that you received the message. Unfortunately, taking a trade so far ahead of the event subjects the position to negative drift and slippage. Prices can hit our stop before the news is even released, something that happened twice this week. Most of the time the stop out actually foretells that our direction was wrong as the news misses our expectations, but occasionally negative drift takes us out of what turns out to be a very profitable trade. Furthermore, our model is based on the idea of quickly cutting our losses and negative drift has the insidious effect of generating maximum rather than minimum losses.

So starting next week we are going to alter our message and entry delivery protocol to minimize the problem of negative drift. We will still issue our trade recommendations about 2 hours before the event, and we will still provide you with our 24 hour trading plans, but we will now actually enter trades 10-20 minutes before the event, minimizing the pre-event noise. We will post our entries in both chat room and on the website, which have a timestamp and provide as near an instantaneous information flow as possible –eliminating some of the slippage and communication problems we saw this week. We will continue to send out all exit and trade update alerts via email and SMS as before. In short this is a rather minor change. We will continue to offer you as much information as possible through email, SMS, web site and chat room, but by making this adjustment we will be able to provide you with better entry signals and hopefully offer you a more robust model to trade.

There will be no trade alerts on Monday but the rest of next week promises to be busy so stay tuned for our updates.

Boris and Kathy

Risky Business

What’s trading all about? If I were to ask that question of a group of ten novices the answer inevitably would something like, “It about making money, fast!” In short to novices trading is all about reward. Indeed most investment newsletters prey on those misguided beliefs by promising vast riches with minimal effort or loss.

At BK Advisor we do the opposite, every week we strive to show you the “real” side of trading with its highs its lows and all of the mishaps that occur in such a human enterprise, especially one that is based primarily on psychology. This week we had a letter from a sub who informed us that he was looking forward to our stunning returns, but instead of promising him the moon, I tried to temper his expectations by telling him that this game is hard. Don’t get us wrong. Profit is our ultimate objective. We always try our damndest to pick the nest possible trades and we spend every day tying to improve our selection process, but it doesn’t mean that we always succeed. Which brings me back to my original question – what trading all about?

Pose that question to a bunch of pros and they will tell you in no uncertain terms that trading is all about risk. Note the difference. Novices think primarily about reward, pro’s focus almost exclusively on risk, and that I believe is the reason most novices lose to the pros in the long run.

Paying attention to risk does not mean that you shy away from trades. Another sub wrote to us that he thinks that is always better to give up an opportunity than to incur a loss. On the face of it this premise seems eminently reasonable, but in fact it is classic novice thinking. The reality of trading is that you can never obtain a reward unless you assume risk. There only two risk free ways to earn money. You can put it in T-bills or you can cheat. And since none of us wants to go to jail for insider trading we have to make our money the old fashioned way. As John Houseman used to say in those Smith Barney ads we have to “EAAAAAAAARN it.”

Trading is nothing more than taking risk. If you sit on the sidelines like a wall flower you will never be able to achieve the profits that you seek. This week illustrated that point quite well. If we simply curled up into a little ball after the bad BoE trade on Thursday, we would have never taken the CAD employment trade on Friday. While we lost 25 points on the long GBPUSD trade we made 53 points on the short USDCAD trade and the net result was that we were up 28 points overall. That’s reality based trading. It’s not simply an easy, smooth ride from one profit to the next, but a rather often bumpy journey of triumphs as well as setbacks. Hopefully once the dust settles it finds you further along on the road towards financial freedom.

Of course taking risks, doesn’t mean taking every risk, and some of you properly took us to task for trading the BoE rate announcement in the first place. As you noted, we typically trade Tier 2 or Tier 3 news releases where there is much les speculative scrutiny and opportunities for surprise are far better. What were doing trading a Tier 1 report like the BoE rate hike? Fair question and we will be far more circumspect in doing so in the future. The only thing I can say in our defense is that we traded 1 unit instead of 2 and therefore limited our risk considerably.

Tier 1 reports are of course the reason we rarely trade the US NFP number as well. In conclusion of this week’s letter, I think its very instructive to examine the price action following both the BoE rate hike and the US NFP reports. In the case of the BoE announcement, the UK Central bank hiked the rates as expected but lo and behold the price of pounds plummeted before reversing higher for 100 points! In the NFPs the EURUSD did momentarily dip in reaction of the news only to rally hard for the rest day in total contradiction to the underlying fundamentals. Like Claude Raines in Casablanca many of you were shocked! shocked! that such blatant manipulation occurred in the markets.

Welcome to the real world. During these Tier 1 releases when everyone is leaning one way, market makers and other large participants will often shake out the weak players before taking price in its true direction. That just part of trading and sometimes you will be the sucker in the move. The key as always is to limit you risk – to never get stubborn and try to prove the market right. That’s the difference between being a loser with a small “l” and a Loser with a big one. In the first case you can always walk away to fight another day, in the second they typically take you out of the market with a margin call. Financial markets only offer you opportunities, not guarantees and the moment you realize that will be the moment you’ll begin to think like a pro.

Next week both K and I will be in Dallas for the FXCM expp. Those of you in the area, please come by to say hello but next week’s weekly will be published on Sunday rather than Saturday.

Wishing you a great week-end

B& K