Sun Tzu and Trading - 10/19/08

I have a copy of "Sun Tzu's Art of War - The Modern Chinese Interpretation" by General Tao Hanzhang. Back in 2004, I wrote down a few quotes from the book because I thought that they had some relevance to trading. While looking through the bookshelf, I found these quotes, and I still believe that they are relevant to trading.

"If ignorant both of your enemy and of yourself, you are sure to be defeated in every battle."

This is definitely me in my early attempts at day trading, and the many years of swing trading and investing in equities. I never took the time to understand market structure, fundamentals or technicals of the markets, or the psychology of myself and other traders and investors. In addition to analyzing market data to understand the ups and downs of any market in any time frame, you also must understand the emotions of others, and your own psychological limitations. That is why I have been a constant reader of Dr. Brett Steenbarger's blog. Some of his better posts lately:

• "How Can I trade the Way I Want to Trade?"
• "Cross Talk: Trading the Way You Want to Trade"
• "The Need To Be Right Versus The Need To Make Money"
• "The Two Trading Problems I'm Hearing Most About"
• "Thoughts About Breaking Trading Slumps"
• "When Good Trading Leads to Bad Trading: Breaking Problem Cycles"

"A victorious army always seeks battle after his plans indicate that victory is possible...Whereas an army destined to defeat fights in the hope of winning but without any planning."

Me again in my early years. I never wanted to take the time to analyze trading setups that lead to high probability wins. I never wanted to plan a trade. The result was many years of losing money.

"The momentum of one skilled in war is overwhelming, and his attack precisely timed."

Much ado about training and planning before entering a battle or a market trade. Did you know that the Spartan warriors of 2500 years ago had to first go through 12 years of intense hand-to-hand combat training, and demonstrate the willingness and ability to kill another human with their bare hands before being eligible for entry into the Spartan army? I am not advocating that our troops go around killing to demonstrate their skills, but when a Spartan King went into battle, he knew that the men standing behind him were the best that the world could offer. Take the time to train and plan before trading.

"In the tumult and uproar, the battle seems chaotic, but there must be no disorder in one's own troops."

If you have the discipline to train, plan and develop the rules for high probability trading, and have the discipline to properly select your trades with the proper market setup and proper timing, you will be a winner in the long run, even in a chaotic and volatile market. Others in the market will fall prey to their own emotions, but you will be profiting from their inexperience and lack of discipline.

"He who occupies the field of battle first and awaits his enemy is at ease, and he who comes later to the scene and rushes into the fight is weary."

Plan ahead and wait for the proper setup, and you will be confident and at ease in your trading. Always trade with emotional impulsiveness, and you will surely lose. If you are late to the party, do not enter a trade out of frustration for having missed a significant market move. If you are tired and not at peak mental alertness, go away and trade another day.

Training, Planning and Discipline creates confidence.

Charles