But what was the risk?

My nephew's 8th grade basketball team (think 13-14 years old) was playing in the championship game for the league last night. The team they were playing they lost to earlier in the season, but they were closely matched. The score was tied with a few seconds left. My nephew's team had the ball.

This is what happened...

Amazing! Impossible! Improbable!

What made "The SHOT" so improbable.

  1. It was in a championship game and the score was tied. Most games don't come down to the last shot. I guess a championship game has a bigger probability of it happening since both teams are likely evenly matched. Nevertheless the probability is not 50-50.
  2. The shot was from 3/4 court. I don't know how far away that is but it is a long way. For it to swish through the basket from that distance, the trajectory of the ball had to be perfect. The science that goes into that calculation (and it can be figured out mathematically) - probably had a variance of less than fraction of an inch from point of release. IN other words if the ball took off 1/2 an inch offline at point of release, it would be off by a multiple of that by the time it got to the basket. Add spin and other external factors like air flow in the gym (and probably other things I do not know about), and that translates into a VERY low probability of success.
  3. Note what the player who shot "The SHOT" did on the play BEFORE the shot. He was going backwards toward the other teams basket. Why? What made him move that way, when all instincts - I would think - would say go forward? There were only 2 seconds left in the game after all. He really did not have to defend the opponents basket? For whatever reason, he went that way - he went backwards BEFORE the first shot was blocked right back to him. Being in that position was improbable. I am scratching my head wondering why he did that...
  4. The opposing player was in his face. He was defended as if "The SHOT" was 10 feet from the basket. If you ever played basketball, the difficulty goes up with more defensive pressure. He WAS defended. That guy was in his face trying to block a shot from 3/4 court.
  5. The kid was falling backwards. When I was a kid, my friends and I used to mimic Marv Albert, the legendary announcer for the NY Knicks who would say "Frazier backs in. Fade away jumper.....YES!!!" A fade away jumper from 15 feet is hard. From the distance of "The SHOT"....improbable.
  6. The kid is 14 years old. I would have a tough time reaching the basket with no one on me, standing flat footed in an empty gym from that distance. He is smaller, weaker, less developed. He was falling BACKWARDS. Where the heck did he get the strength to heave the ball that far? Are you kidding me! That kid has an arm!

ESPN SportsCenter Top 10? You bet!

Buzzer beaters...they feel great! My sister-in-law said the dog pile was huge!

The trophy will be in the school trophy case for a long time, but over time, it will just be another trophy in the trophy case. However, the memory of "The SHOT" will last forever (Heck I remember when I made a last second layup - with my left hand - when I was 14 years old to beat St. Mathias in a cold gym in Bound Brook NJ).

One thing is almost 99.9999% certain, that exact improbable moment will likely not happen again...So be happy but recognize it for what it was. An amazing, impossible, improbable event.

Also understand that the other team...the ones not in this picture - are not as happy. They are not holding the trophy. They will have the memory, but it will be a different memory. They were on the losing side of an improbable, random event.

I remember my last second heroics from my last second left-handed layup in Bound Brook NJ (I am right handed), but I also remember sneaking away to a quiet spot and balling my eyes out, after being on the other end of high school football game that went the other way in the last seconds...That hurts.

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As traders, we have the opportunity for "Buzzer Beaters" in our trading too.

This coming Friday (and every first Friday of every month), the US will release the US Non Farm Payroll report. Events like this one come with a high degree of risk. Not only is there the usual Market Risk from the supply and demand flows (that risk is there whenever the market is trading), but there will also be increased Liquidity and Event Risk. The risk-o-meter is at a "red alert" level.

Many...90%...of retail traders tend to "think they know" the employment report will be stronger or weaker than the "expectations". My question is "How do you know?" or "What makes you think that?"

Last month there were no economists estimates of 292K (really 342K because there was a 50K positive revision) and they are paid big bucks to model these sorts of things. Do you - in your home office - know more? Reality check. I don't think so?

OK...it is just a guess...a feel....a hunch. But we have a 50-50 shot of the price going our way initially, right?. That probability is much higher than "The SHOT". But what is the cost of that bet?

That 50-50 probability of the price moving your way initially comes on the first price print after the announcement. You sell the EURUSD. NFP comes out at +220K, the price goes lower. You win on that initial flip of the coin.

But the game goes on from that point with a series of 50-50 bets that the price will continue in the same direction of your "shot" (i.e., to stay short). The 50-50 bet is on every pip. Does the last pip go your way? If so, are you still willing to make that same bet? Whoops it ticks the other way. Do you want to make the same bet?

I liken the experience to betting red on a roulette wheel that spins continuously. How would you feel with the wheel spinning and instead of the ball working it's way around, it just goes to red or black instantly. Then it automatically spins again and automatically goes to red or black again. Then again, and again, and again. YIKES! Get me out!

In trading, there is no buzzer that says the game is over until you say so by closing your position, and the market is moving fast...Faster than 14 year old's on a basketball court.

Market risk from the invisible supply and demand flows is out there still. What are the other players doing? What are they thinking? Does a sovereign wealth fund have to buy EURUSDs, or is their big corporation or hedge fund who needs to do the same thing?

What about Liquidity Risk? That remains sky high. Liquidity Risk causes the price bid/ask spread to widen. It will also result in some market makers to leave the "bar room brawl" and stay to the sidelines for a period of time. The wheel spins and it is red. Then it is black and black and black, then red and black and black. We really cannot measure the liquidity risk while it is in motion. Eventually, it goes back to normal, but we don't know when. That causes all sorts of volatility.

Then there is the Event Risk. But the event is over after the headlines, isn't it?

The initial headline risk is, but there is always the interpretation. Was the weather an impact? What did the participation rate do or hourly earnings? Where were the jobs created? Were a lot of the jobs temporary jobs? What was the mix of jobs? Is it as good as the number implies?

What about the ancillary event risks. What is the Fed to do? How will the stock market react? How about oil and the bond market?

All these things are trying to block your trading shot. That increases your fear during high risk events where the risks are at red-alert levels.

The basketball player who launched "The SHOT" from 3/4 court, did not really have fear, did he? The clock was going tick 0:00, the game was tied. The other team scoring was probably a more likely scenario than his heave-ho ending in the bottom of the well, but it was still not even a thought.

If the player was instead on the free throw line with 0:01 second on the clock, the fear might have been greater. Fear alters the outcomes. It has an impact on a player and on games. Leads are blown. Free throws are missed. The balls bounce the other way more often than not when fear is increased.

For trader there is fear too. In normal market risk conditions, we can use technical tools to control fear. However, into - and through an employment report - where Market Risk, Event Risk and Liquidity Risk are at red alert levels, the fear can overwhelm you. It is more like being on the foul line with a shot to win the game or lose it. Heaving a shot from the opposing teams foul line is so improbable there is little fear.

Have you ever wondered why a key report comes out that is unequivocally bullish or bearish and the price goes one way, and then corrects back the other way? FEAR.

In trading the FEAR is exasperated by the fact there is a true negative outcome. You could lose money quickly and you really don't know why. You think..."What do they know that I don't know?. I better not wait around." and you get out. You are not alone.

Sometimes after that trade, the price continues to go in the direction of the correction. You feel you made the right decision to get out. IN reality (reality check), it was just blind luck. Sometimes you get out and it goes back the other way. You blame yourself for being a chicken.

The fact is, it is random when market, event and liquidity risks are high, and it is having an impact on fear on all traders. That fear can be overwhelming and cause all traders to do strange things.

All that is if the report comes out as expected (lucky outcome). What if the employment report does not come out bearish for the EURUSD but bullish. That is where you feel the real cost of the bet. You are really behind the eight ball now with regard to what you have to do next. Get out. Stay in. "Wow, look at the loss." Market, Event and Liquidity risk continues. If fear effects you when you win, and risk is still high, it really effects you when you are losing and risk is still high.

I try to avoid those situations...

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Folks, you can take a "buzzer beater shot" during an employment report or other high risk event, and you may indeed win. You will feel great.

But understand it was just blind luck. The gods were shining on you. Enjoy it. Dog pile yourself. Tweet it out. Get it on the "CNBCs Top10" for the day.

Also understand that you have a chance your bet goes the other way and you can end with nothing - well less than nothing - if the roulette wheel comes up black instead of red on that initial "shot". Will you recover from that? It depends. We don't really know the risk of that first spin of the wheel (nor the subsequent spins). I like to think I recovered from the last second football loss in the grand life scheme. However, I know the recovery was not on the football field.

"The SHOT" was impossible, improbable, but there was not much risk. The employment report trade, might not be as impossible or improbable, but the risk is likely to be greater.

Be aware. I want you to enjoy victories of trading in your trading, not in the lessons learned later down life's road. So be smart.

Oh....congrats St. Johns! I hope some of your good luck rubs off on us this week - before the unemployment spin of the wheel.