Sun Tzu and Trading
Students of the market are constantly battling between the emotions of fear and greed. The Art of War can help you cut a path between these two emotions and lead you to a mental place that will constantly help you put your best foot forward. In this series I will address various poor trading habits by excerpting and interpreting various passages. While my interpretations are not meant to be definitive by any stretch of the imagination my goal is to get you thinking.
They say the game of golf is not played on the green, it’s played between your two ears. Trading futures, forex, options, or stocks is much the same way. Your mental game must be up to par. If not, failure is inevitable. In the end I hope you find the discipline to be a speculator and not just your ordinary gambler.
Book 6 : Fortitude and Frailty Pg. 52
“A large force cannot necessarily overpower a smaller force ... If the small force is adequately organized it can wreak havoc upon the slowness of the larger army. These are called hit-and-run tactics. ”
You are the “small force” battling it out in investment markets valued in the trillions. By focusing and concentrating your efforts in a handful of markets, with optimum opportunities for success, you have the ability to utilize “hit-and-run tactics”. This is the only way to become profitable. You have finite capital, finite time. So the question becomes will you let your opportunities overwhelm you or will you take control of your fear and greed? While it will take trial and error if you take your time and do your research to operate like the hedgers “large group” you will be rewarded.
I teach my clients how to use accumulation/distribution, open interest, volume, and the commitment of trader's report to see the patterns evolving from the hedgers and larger speculators. These two groups develop their positions over long periods of time. Therefore, they are always telegraphing their position. The goal is to use their superior strength in your favor by catching the waves that they initiate and moving with the ebbs and flow of the market by using sound risk management techniques.
Book 7: Manipulation of Circumstance Pg 57
"Manipulation must be employed as deception/no-deception... Deception/no deception means you proceed without preconceived notions of victory or defeat. This is accomplished by proper planning."
The majority of traders come to trading undercapitalized to fulfill their vision. Many have caviar dreams with only Big Mac money in their pockets. It quickly becomes clear that in order to succeed as a trader you must manipulate all of the various opportunities in front of you.
The trick to that is being able to apply money management, technical analysis, and risk management techniques together in order to be a complete trader. When I work with clients I teach them how to utilize synthetic options, collars, and retail hedging techniques in order to be able to trade both sides of the market, while protecting as much capital as possible. This is part of the proper planning that you need in order to have an edge in the markets. Even with all of these tools at your disposal you must still approach each new opportunity with fresh eyes. A trader's greatest asset is his ability to set aside the psychological need to be right so he can be profitable.
Book 7: Manipulation of Circumstance pg 61
"The spirits of most warriors, with rare exception, vary with time. In the morning a warrior is filled with vitality and seeks to do battle, in the afternoon he may tire if the expectancy of combat has not been fulfilled, and in the evening he will long for home and seek to be there instead of being on the field of battle."
Understand what types of trading works best for you “spirits of most warriors... vary with time” If you find yourself hitting a brick wall with your active trading don't be afraid to move to swing trading or position trading. The contest is not how often you trade it's how profitable you can be. Play around with different time frames for different markets. Don't get caught into the falsehood that there is only one way to trade futures or forex.
I am going to let you in on a secret. If you are trading spot currency, futures, or options on their own you have cut your slim chances of success to none. Don't get me wrong, you will have winning trades, but it will only take that one trade, that unexpected trade, to wipe out everything you labored to build.