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

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