Monday, July 19, 2010

The Art Of War(Trading)

Today i was watching a TV show on this well known Chinese Military strategist named Sun Tzu who dates back hundreds of years ago and i could not but help notice the incredible similarities between trading and WAR. So here's a very unique post that you are only likely to see here at the ART OF TRADING. Please enjoy as it took me a few hours to put this together for you.

Who is Sun Tzu?

Sun Wu better known as Sun Tzu was an ancient Chinese military general, strategist and philosopher who is traditionally believed to have authored The Art of War, an influential ancient Chinese book on military strategy. Sun Tzu has had a significant impact on Chinese and Asian history and culture, both as an author of The Art of War and through legend. During the 19th and 20th centuries, Sun Tzu's The Art of War grew in popularity and saw practical use in Western society, and his work has continued to influence both Asian and Western culture and politics.

Historians have questioned whether or not Sun Tzu was an authentic historical figure. Traditional accounts place him in the Spring and Autumn Period of China (722–481 BC) as a military general serving under King Hel├╝ of Wu, who lived c. 544—496 BC. Scholars accepting his historicity place his supposed writing The Art of War in the Warring States Period (476–221 BC), based on the descriptions of warfare in the text. Traditional accounts state that his descendant, Sun Bin, also wrote a treatise on military tactics, titled Sun Bin's Art of War. (Both Sun Wu and Sun Bin were referred to as Sun Tzu in classical Chinese writings, and some historians thought that Sun Wu was in fact Sun Bin until Sun Bin's own treatise was discovered in 1972.)

Here are some his quotes from his book ART OF WAR which were originally written on bamboo sticks: Also, underneath the quote is my interpretation of how i relate the quote to trading.

Invincibility lies in the defense; the possibility of victory in the attack.
Sun Tzu

<<< CASH IS KING: The best offense is defense: We all heard this one before but think about it in trading terms: when you are dealing with a market that is hard to navigate, many good traders will simply stand aside, move to cash and play 'defense'. They will attack when the opportunities arise but overall know when a battle is worth fighting.

The general who advances without coveting fame and retreats without fearing disgrace, whose only thought is to protect his country and do good service for his sovereign, is the jewel of the kingdom.
Sun Tzu

<<< Once again, this goes hand in hand with managing losing trades, it's okay to be wrong and walking away from a wrong trades with grace and poise is needed to long term survival in trading battles. No shame in taking losing trades: it's part of the game we play: In every war that was won, there were battles that we lost. Needless to say that arrogance and large egos have NO PLACE in trading. Refusal to admit mistakes is when traders get themselves into deep waters. It's okay to be wrong but it's not ok to stay wrong. So it's okay and signs of a very mature trader to retreat when the waters are dangerous or treacherous. NO EGO games in trading.

The general who wins the battle makes many calculations in his temple before the battle is fought. The general who loses makes but few calculations beforehand.
Sun Tzu

<<< Good traders do their home work and research before tackling on the new market day. Having a watchlist or preset alerts that trigger when certain prices are achieved is the first thing that comes to mind here. Have a battle(game) plan ready and be ready to follow it with strict military precision. Entry, stops and position sizing should be all well calculated within the game plan.

The quality of decision is like the well-timed swoop of a falcon which enables it to strike and destroy its victim.
Sun Tzu

<<< Long time ART OF TRADING members know one quote i repeat here over and over again: THE BEST TRADES WORK RIGHT AWAY! A well timed trade is a trade that hits on all cylinders almost immediately after the entry and starts producing: these are the trades that end up being the big winners and usually cause the least stress and head aches.

The supreme art of war is to subdue the enemy without fighting.
Sun Tzu

<<< Why fight in a market that is fighting you back? The best trading days are "EASY": The moves are clear and crisp: movement with confidence. The patterns are clean and sharp: Choppy and difficult to trade markets frustrate everyone(pros and newbies alike). If a market is hard to trade: DO NOT TRADE IT.

Thus it is that in war the victorious strategist only seeks battle after the victory has been won, whereas he who is destined to defeat first fights and afterwards looks for victory. Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.
Sun Tzu

<<< Know what your trades are going to do and why you are placing your trades: Do not trade just for the sake of trading. Size up a market well before entering into it's waters. Don't place trades impulsively and ask yourself afterwards: "Why did i do that??" Good traders know what is a good market and what kind of market or environment is best suited for their partcicular style and what market action is best for their edge to be exploited in order to best increase their chance at a win.

If you know the enemy and know yourself you need not fear the results of a hundred battles.
Sun Tzu

<<< Know what kind of trader you are where lies your edge. This is especially true in a market that is tough to trade, choppy and directionless are most trader's enemy. Know yourself and your edge and only deploy capital when your edge has emerged. The best traders trust themselves and trust that they will emerge victorious as they know their capabilities/skills. If you know yourself and how you will react to certain market conditions then you will not afraid of the battles.

He who knows when he can fight and when he cannot, will be victorious.
Sun Tzu

<<<< It's a known fact that the best traders know when there is an edge to trade and take quick decisive action. The best traders are willing to wait and wait til the 'perfect storm' arrives. It's not about how many trades you place but WHEN you trade to exploit an edge that makes all the difference. Know when to NOT trade is the key in my humble opinion.

You have to believe in yourself.

Sun Tzu

<<< You gotta believe in YOURSELF and your skills as a trader otherwise who will?

Trading Is War but NEVER forget TRADING IS AN ART!

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