Trading Systems Art of War – Can it be Applied to Trading?

Introduction

Many traders think that to make consistent profits in the markets, all you need is a holy grail. From my experience, a trading methodology or system is only one of the ingredients of success. The advancement of technology blinds us into thinking that all we need to be successful is state-of-the-art kit and the latest software. After all, banks fit into this category and they tend to do pretty well. However, technical wizardry is only of value if you know what to do with it. Does Warren Buffett rely on the latest technology to make his investments, or does he put his faith and his money into time tested principles of yesteryear? Modern technology is a useful tool for many traders, but to ensure it’s used wisely and to full advantage, they may benefit from studying some military principles dating back to around BC500.

The Art of War is an ancient Chinese military treatise attributed to Sun Tzu (also referred to as "Sun Wu" and "Sunzi"), a high-ranking military general, strategist and tactician. Regarded as a classic military text, it was thought to have been compiled during what is known as the ‘Era of Warring States’, which resulted in a unified China under the Qin Dynasty. What does war have to do with trading? Well, the two are comparable in many ways. Soldiers fight the battle, but it’s the thinking and decision making processes of the generals and politicians that tend to win (or lose) the war. Similarly, traders require computers and fancy software to execute their trades, but it’s their ability to assess the markets and how well they execute their trading plan that results in profit or loss.

Like war, trading is a brutal game. Generally speaking, for every winner there are one or more losers. To help ensure you are on the right side of this divide, it may pay you to consider the principles contained in The Art of War. What follows is just a selection, not the complete book, and your interpretations of the text may be different from those offered here. For clarity, the principles are divided into four sections.

Section 1: Purpose

If you are to progress beyond the initial learning stage, a mere desire to make money is not enough. Your trading must have a clear purpose.

Section 2: Market Condition

Do you know who your enemies are?

Section 3: Strategy

The importance and value of having a proper trading methodology or strategy

Section 4: Trading Routine

What is your daily trading routine?



Section 1: Purpose

1. The Art of War
“Maintaining the goodwill of the people is essential to win the battle.”

Applied to trading – The people of a nation will support a war if it has a clear purpose and benefit to them. Similarly, as a trader, just wanting to make some money and have a better lifestyle isn’t a strong enough purpose to sustain you through the inevitable trials and tribulations that lie ahead. A more personal goal is needed; one which really excites and motivates you.

2. The Art of War“In battle, where there is no retreat or surrender, soldiers will have nothing to be afraid of and there will be nothing that they can’t achieve.”

Applied to trading – As a trader, you must have a winning mindset and focus on the big picture. Do not allow small setbacks in the form of inevitable drawdowns to shake your confidence or weaken your resolve.

3. The Art of War“Maintaining the momentum of troops during war is important.”

Applied to trading – Try to maintain your momentum and do not get sidetracked and depressed after a string of losers or overexcited after a string of winners.

4. The Art of War“So in war, the way is to avoid what is strong, and strike at what is weak.”

Applied to trading – Understand the strengths and weaknesses of your methodology and your ability to execute it well. Add more positions once the market confirms your trade direction. If in any doubt, either get out or reduce your position size.



Section 2 – Market Condition

1. The Art of War
“If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

Applied to trading – Once you understand the current state of the market, you’ll have a better idea of how to trade it. Determine whether it is a bull market, bear market or a range bound market. Also, assessing the volatility is crucial in order to determine position size and stop placement. Equally, you must know your own strengths and weaknesses and how you can capitalise on the former and cap the latter in any market condition.

2. The Art of War“To know your Enemy, you must become your Enemy.”

Applied to trading – To really understand the current state of the market, you need to think like everyone else, see what they see and feel what they feel. But, you don’t have to act the way they act.

3. The Art of War“For should the enemy strengthen his van, he will weaken his rear; should he strengthen his rear, he will weaken his van; should he strengthen his left, he will weaken his right; should he strengthen his right, he will weaken his left. If he sends reinforcements everywhere, he will everywhere be weak.”

Applied to trading – You need to adapt to the prevailing market condition and trade an appropriate methodology. There’s no point utilising a trend following strategy based on a moving average cross-over in a range bound market.



Section 3 - Strategy

1. The Art of War
– “Outwit the enemy instead of trying to outfight the enemy.”

Applied to trading – Trying to outfight the market is sheer folly. You will lose. For example, if you risk 50 pips for a gain of just 5 pips, you may have a series of small wins, but you’ll end up giving back all your profits and more in one or two losing trades.

2. The Art of War“The supreme art of war is to subdue the enemy without fighting.”

Applied to trading – Take two traders who make the same amount of money using same capital in the same amount of time. The better trader is the one who has fewer trades and lower transaction costs and spends less time gazing at their computer screen.

3. The Art of War“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.”

Applied to trading – Traders don’t need to trade every day or every minute to make money. Always wait for correct setup before entering the market.

4. The Art of War – “In battle, use a direct attack to engage and an indirect attack to distract enemy attention.”

Applied to trading – Always look at the major trend. When there is pull back in prices, don’t assume that it is a change of trend. Trading with the trend will increase your chances of success.

5. The Art of War – “Use attack to exploit victory, never use attack to rescue defeat.”

Applied to trading - Do not add to a losing position in the hope of being able to average out. Only ever add to profitable trades.

6. The Art of War – “Victory comes from deep thinking and detailed calculation.”

Applied to trading – If you try and trade a methodology that you don’t understand fully (e.g. someone else’s) or one that hasn’t been properly thought out and tested (e.g. your own) – then most likely you will fail.



Section 4 - Trading Routine

1. The Art of War
“Superior command structure within the army.”

Applied to trading – You need to organise and structure your trading to ensure you’re doing the right thing at the right time. For that, you need a detailed trading plan. Every ‘t’ must be crossed and every ‘i’ must be dotted to ensure that mistakes are kept to a minimum. This will help to minimise losses and maximise profits.

2. The Art of War“Even the finest sword plunged into salt water will eventually rust.”

Applied to trading – Even the best traders will crumble if there is no support from those around them. Do not allow your desire to trade to have a negative impact on your family and friends, otherwise you run the risk of losing them.



In Summary

The Art of War by Sun Tzu has inspired lots of people from many different walks of life and disciplines, ranging from business to sports and everything in between. Some commentators believe that there are wars that could have been avoided and battles lost that could have been won – had the politicians and military leaders followed the principles contained in this ancient text. This article is intended to offer a flavour of how the text might apply to trading. Indeed, your interpretations of the principles may be very different to those offered here – and that’s fine.

Regardless of your views about this article, there are two overriding principles that emerge from the Art of War that you could benefit from. The first is to look beyond your computer screen or the trading books on the shelves in your study for ideas and insights about how to trade the markets. There are lots of fields of human endeavour that utilize techniques and approaches that could be applied to trading. The second is that if you’re to be successful, then you need to approach your trading with the same degree of care, thought and attention to detail that Sun Tzu advises military leaders adopt when preparing for battle.

Ted Kwek can be contacted by email at Ted Kwek
 
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Re: Art of War-Can It Applied to Trading?

I find that your interpretations were helpful. A successful trader needs to have a purpose(s) for this activity. Without a clear purpose, the trader will lose his focus and committment - even with winning trades. He will not try to continue the activity when he loses many trades in a row. Somebody trades for a himself to make a living. Somebody trades for an organization such as investment club, universtity retirement fund etc... In any case, the trader without a purpose will eventually end his trading career with defeated mind.
 
agreed 0007.........Sun Tzu's book is a master piece ....but in the right place for the right purposes

its certainly useful if you want to be a warlord in ancient china...will keep it around if that opportunity arises :p
 
I'd go along with most of that. Trading requires discipline and this applies to all members of the Armed Forces
 
Each of us is the sum total of everything we've read, heard, seen, thought and done. One book will not massively or indelibly change you from what you already are. Those with the best chance of success in any sphere will be those with the least amount of unnecessary baggage and with the greatest raw, natural talent for the task at hand.

I've yet to find any training programme produce anyone even close in instincts to those who come on board with the skills inbred. But if you're going to go for it, then by virtue of my opening sentence, throwing yourself at every book on the subject to the exclusion of everything else might provide you, in time, with the rudimentary prerequisites to take a shot at it with a better than evens chance of success.

It also follows from my opening premise that the less you already know, or think you know, that much easier will it be for you to influence yourself along the right channels. If the sum total of your knowledge is the size of an oil tanker, you'll find it that much harder to allow the insights from one book to turn your course than will the fellow in the little rowing boat. Which is why it is often those from the least likely backgrounds who seem to do so much better than those that have been more widely educated.
 
Each of us is the sum total of everything we've read, heard, seen, thought and done. One book will not massively or indelibly change you from what you already are. Those with the best chance of success in any sphere will be those with the least amount of unnecessary baggage and with the greatest raw, natural talent for the task at hand.

I've yet to find any training programme produce anyone even close in instincts to those who come on board with the skills inbred. But if you're going to go for it, then by virtue of my opening sentence, throwing yourself at every book on the subject to the exclusion of everything else might provide you, in time, with the rudimentary prerequisites to take a shot at it with a better than evens chance of success.

It also follows from my opening premise that the less you already know, or think you know, that much easier will it be for you to influence yourself along the right channels. If the sum total of your knowledge is the size of an oil tanker, you'll find it that much harder to allow the insights from one book to turn your course than will the fellow in the little rowing boat. Which is why it is often those from the least likely backgrounds who seem to do so much better than those that have been more widely educated.


Hi AJStanbridge

I am sure I know of you ??

Very interesting comments - and although I dont totally disagree - I would ask a question

Don't you think the guys who may not be so widely read - or lack a lot of knowledge of life - might be the the traders who are easiest led?

The Industry and the market are our enemy

They depend on tricking - by false sentiment and deception all types of traders - from the Mensa elite to the normal young housewife who as no A levels or degree.

Surely the ones lacking the most knowledge might be easily led ?

Only my own thoughts - but would love to know yours ??


Regards


F
 
Hi AJStanbridge

I am sure I know of you ??

Very interesting comments - and although I dont totally disagree - I would ask a question

Don't you think the guys who may not be so widely read - or lack a lot of knowledge of life - might be the the traders who are easiest led?

The Industry and the market are our enemy

They depend on tricking - by false sentiment and deception all types of traders - from the Mensa elite to the normal young housewife who as no A levels or degree.

Surely the ones lacking the most knowledge might be easily led ?

Only my own thoughts - but would love to know yours ??


Regards


F
Yes, that was my point. Wouldn't you think it would be a good thing to be easily led to be successful in one, or more, areas of commerce? It's a lot easier to teach a young dog new tricks.
 
Yes, that was my point. Wouldn't you think it would be a good thing to be easily led to be successful in one, or more, areas of commerce? It's a lot easier to teach a young dog new tricks.

OK

I see what you are saying now

However in this trading "game" the real knowledge is not open to all - so really the trainers and the teachers etc etc - are teaching the young dogs all the wrong tricks

Maybe only 10% or less of the tutors or trainers are successful at the actual art - so you then think might the ones who are successful - trade - and dont educate or pass on their inner knowledge - whereas the others can really only make their main money by selling what knowledge they have - and not just from trading alone ?

That knowledge passed onto more young dogs - sees more failures - ie a repeat cycle

For me - the Industry - the market - the guru's the market analysis guys etc etc - are all my enemy - and so I don't believe them.

My trading knowledge had to come via "self taught" along with help that fitted in with what I already knew from my past journey.

Regards

F
 
False sentiment and deception. There is that. But primarily it is an individual's sentiments that are false and the deception played on oneself most often without conscious awareness that gives rise to the vast majority of situations where such charges are brought. There is the trickery and chicanery of the markets and the market players themselves, but the basis for these is known to all as in any game willingly enjoined, and it is to those with the greatest skills in understanding the rules and abilities to game the system to whom the greatest spoils accrue. Surely that is as it should be?

Not knowing your situation I can only hypothesise, but if you regularly make profits from your trading, do you stop to consider those from whom you take money may consider 'the industry and market' is their enemy rather then you and your superior trading activities? Who should they blame? You? The markets? Or themselves?
 
OK

I see what you are saying now

However in this trading "game" the real knowledge is not open to all - so really the trainers and the teachers etc etc - are teaching the young dogs all the wrong tricks

Maybe only 10% or less of the tutors or trainers are successful at the actual art - so you then think might the ones who are successful - trade - and dont educate or pass on their inner knowledge - whereas the others can really only make their main money by selling what knowledge they have - and not just from trading alone ?

That knowledge passed onto more young dogs - sees more failures - ie a repeat cycle

For me - the Industry - the market - the guru's the market analysis guys etc etc - are all my enemy - and so I don't believe them.

My trading knowledge had to come via "self taught" along with help that fitted in with what I already knew from my past journey.

Regards

F
The 'real knowledge' is open to all. But few will make the considerable effort to obtain it. Those that can trade well do so and their skill is rarely teaching others. It is up to the acolyte to obtain as much as they can in the best way they can from those that can without expectations of having those skills dissected and structured in a way optimum to their own needs. Your point regarding teachers, trainers etc is very possible an astute one, but I have no direct experience.

As for 'the Industry - the market - the guru's the market analysis guys etc etc - are all my enemy ' as per my point made earlier - We have met the enemy and they are us.
 
False sentiment and deception. There is that. But primarily it is an individual's sentiments that are false and the deception played on oneself most often without conscious awareness that gives rise to the vast majority of situations where such charges are brought. There is the trickery and chicanery of the markets and the market players themselves, but the basis for these is known to all as in any game willingly enjoined, and it is to those with the greatest skills in understanding the rules and abilities to game the system to whom the greatest spoils accrue. Surely that is as it should be?

Not knowing your situation I can only hypothesise, but if you regularly make profits from your trading, do you stop to consider those from whom you take money may consider 'the industry and market' is their enemy rather then you and your superior trading activities? Who should they blame? You? The markets? Or themselves?

Yes - I would agree with you on these comments

The ones with the greatest skills in understanding the rules and the abilities to game the system - should be the ones who are rewarded with the greatest "spoils" -ie reward to their risk.

I also agree I am the enemy to the industry - in fact any continual winners who fall in the 10/15% continual success group - have in effect beaten the Industry - ie the Industry want as many losers as possible to fuel their gains

They know they cannot end up with 100% losers - no body would stay in trading - but also if over 30 -35% win - it can no longer be looked as tax free in the UK under spreadbetting- ( gambling laws)

So the Industry ideally wants say between 72 and 90 % of all traders to fail

And whats the best way to do that?

Make it difficult - fool as many as possible - but spread the word - its simple and easy

That's my take - so really I suppose we agree ;-)

Regards


F
 
Yes, that was my point. Wouldn't you think it would be a good thing to be easily led to be successful in one, or more, areas of commerce? It's a lot easier to teach a young dog new tricks.

this depends on how well the dog can assimilate, or better, accommodate new information into their existing paradigm. This in itself requires conscious competence/incompetence
 
this depends on how well the dog can assimilate, or better, accommodate new information into their existing paradigm. This in itself requires conscious competence/incompetence
That is precisely my point. The less of an 'existing paradigm' there is, the less of an issue is the assimilation of new information. Which is why I'd be more interested in a career plumber as potential trader material than I would an economics, maths, physics PhD.
 
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