Sunday, November 09, 2014

5 The Art of War, by Sun Tau (circa 506 BC) and The Art of Trading Success (circa AD 1994)

5 The Art of War, by Sun Tzu (circa 506 BC) and The Art of Trading Success (circa AD 1994)

There are two books which I've read and re-read, at least five times each. The first is Livermore's Reminisence: of a Stork Operator, which describes his trading strategy and exploits. Obviously, Livermore is no longer a stranger to readers of this book. The other book is, The Art of War, by Sun Tzu, which is considerably more esoteric and obscure than Livermore. This is a work, written by a legendary Chinese general some 2,500 years ago. It was originally written as a treatise for victory on the field of battle, and if you read it literally, it is a story about men at arms,
attacks by fire, ancient weapons and two thousand year old battle tactics. But, this book, now read and studied worldwide, has greatly transcended its original purpose and intent.

The Art of War is arguably the most influential book of strategy in the world today, as enthusiastically studied in Asia by modern executives and politicians as it has been by military leaders and strategists for the last two millennia. In modem japan, for example, leaders have applied the strategy outlined in this ancient classic to modern business and politics with astounding success. Indeed, some see in the successes of post-war Japan an illustration of Sun Tzu's dictum, ‘to win without fighting is best.‘ Politics aside, The Art of War applies to competition in general, on every level from interpersonal to intemational. Its aim is invincibility, victory without battle, and
unassailable strength through the understanding of physics, politics, the psychology of conflict and most importantly, the individual himself. The Arr of War can be viewed against the background of the spiritual tradition of Taoism and can be the source of great insight into human nature and what makes some individuals succeed and Others fail.

Teaching that life is a complexity of interacting forces, Taoism has fostered both material and mental progress. Above all, -The Arr of War is a tool for understanding the very roots of conflict and resolution, of discipline and patience and, of success and failure. This is most
eloquent and dramatic statement, to be sure. Bur, our interest is financial, not political or social. It is useful to review this book to see what it can offer by way of instruction to the stock and commodity

Sun Tzu wrote: ‘If you know the enemy and know yourself, you need not Fear the result of a hundred battles.’
Well, the longer you operate in financial markets, the more likely you are to see them as a vast battlefield and your campaigns, as battles. And although there are no great armies of archers or swordsmen waiting behind the next hill, you will, inthe financial arena, find yourself in an
alien, unfriendly universe with lots of participants ready to separate you from your capital and your self-condifence. You must know the markets thoroughly. Considerable experience is only half the battle; it must be accompanied by recall, to allow you to take advantage of the valuable lessons learned in past campaigns. In fact, the mere description of past markets as ‘campaigns’ lends additional credibility to the Sun Tzu type of references. As Sun Tzu said, you must know yourself, and
nowhere is that more true than in financial speculation.

Sun Tzu said: ‘The general who wins a battle makes many calculations in his temple before the battle is fought. The general who loses a battle makes but few calculations beforehand. Thus, many calculations
lead to victory and few calculations lead to defeat.‘ ‘The value of time — that is, being a little ahead of your opponent — has counted for more than either numerical superiority or the nicest calculations with regard to commissariat. ’

When you are trading markets, whether you are a day trader or a position trader, and you get an actionable signal from whatever timing indicators you are using, make the trade, and make it fast!
While others are waiting to find out why a particular move is occurring, you should be in there with your order entered, and ready to act on whatever strategy you are using. This is a fast-paced game, and you must be bold and ready to move, whenever your signals ‘tell’ you to go.
This is not the time to hesitate or be timid. Don’t worry about being wrong - your stops will protect you against big losses. But, nothing can protect you against being timid after you get a valid trade signal from a technical method that you believe in.

Sun Tzu said: ‘When you capture spoils from the enemy, they must be used as rewards, so that all your men must have a keen desire to fight, each on his own account.’
Whenever I am in a difficult, extended campaign, and I do something smart (or lucky), I usually reward myself with some tangible that provides satisfaction. This might be a special dinner or, more recently,I bought a camera that I had been admiring, from the winnings of a very profitable trade. Perhaps the epitome of this strategy was when I bought a beautiful custom 46-foot diesel powered sail-boat from the winning of a huge long copper position that I had held, and suffered
with its ups and downs, for nine months. When the position was ultimately closed, it gave me no end of satisfaction to write a cheque for the full purchase price of the sail-boat.

Sun Tzu said: ‘Plan for what is difficult while it is easy, do what is great while it is still small. The most difficult things in the world must be done while they are still easy, the greatest things in the world
must be done while they are still small.’
It is a lot easier to plan a financial campaign in the quiet and security of your oflice while you are still paper trading and preparing your strategy. Every aspect of the total campaign should be studied and
calculated: what to do if prices advance or if they retreat; where and how to add to the position (pyramid) and where and how to reduce the size of the position; if the position turns sour do you just dump it, or do you go into the market with the reverse position? These, and many other aspects of a trade should be analysed and worked out, in advance, before the intervention of big financial risks enter the picture. It is easy to do this in advance on paper; it becomes difficult once you have
committed funds and put your money and your ego on the line.

Sun Tzu said: ‘Strong action is training the body without being burdened by the body, exercising the mind without being used by the mind, working in the world without being affected by the world,
carrying out tasks without being obstructed by tasks.’
We cannot trade to best advantage unless we are fit, both mentally and physically. Almost at one’s best is not good enough. Success in trading, like success in sports competition, concert performance or playing in a chess match requires the utmost of physical and mental conditioning
and concentration, focus and discipline. You'll know if you don't have it and in such cases, stand aside till you know that you’re at your best. Likewise, do not permit extemal influences to intrude on your trading concentration. There was a magazine article about my trading style
which pointed out that I once ignored a fire-drill in my office building; the truth was that I didn't even notice the fire alarm and people evacuating as I was so totally engrossed in the drama that was
unfolding in the market-place and my anticipated response to various market occurrences.

Sun Tzu said: ‘Greed is a fundamental cause of defeat; it is the unemotional, reserved, calm detached warrior who wins and not the ambitious seeker of fortune.’
In response to this, I turn to Jesse Livermore, who recounts how one of his high-flying trading buddies decided to buy his girlfriend a fur coat from his market profits. After several consecutive losses, someone else accepted the challenge and tried to ‘win’ the coat, but he too, was
defeated. Eventually, others in the group tried it, all meeting the same fate, and eventually the project was dropped. The result was, the US$2,000 coat had cost them collectively some US$40,000 and, in the end, the coat went wanting. Winning at speculation is not an easy feat; but it is most practicable when you approach the speculative quest with reserve, detachment and total concentration. If you want to have fun and a good time, do something else for your excitement; when you
operate in the market, be logical and serious. 

And finally, Sun Tzu tells us the following regarding objectivity, assessing situations in a dispassionate manner and the advantages of carefully calculated action:
‘Those who are skilled in combat do not become angered, those who are skilled at winning do not become afraid. Thus the wise win before they fight, while the ignorant fight to win.‘

Let us retum to Livetrnore, for a modem day analogy. ‘Investors who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a market operator has firmly grasped this that he can make big money. It is literally true that millions come easier to a trader
after he learns to trade, than hundreds did in the days of his ignorance.’


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"There is the plain fool who does the wrong thing at all times anywhere, but there is the Wall Street fool who thinks he must trade all the time."J Livermore Manchester City FCl Crude Palm Oil

From Dragons and Bulls by Stanley Kroll
Introduction and Foreword
The Importance of an Investment Strategy
5 The Art of War, by Sun Tau (circa 506 BC) and The Art of Trading Success (circa AD 1994)
That's the way you want to bet
Long-term v Short term trading
Technicals v Fundamentals
Perception v Reality
Part 1: Winners and Losers
Part 2: Winners and Losers
Sun Tzu: The Art of War
Those who tell don't know, those who know don't tell
Why there is no such thing as a "bad market"
The Secret to Trading Success
The Experts, do they know better?
Risk control and money management
Larry Hite: The Billion Dollar fund Manager
Systems Trading:Kroll's Suggested Method
Buy the Strength Sell the Weakness
Good advice
The 'good bets' business by Larry Hite
Don't lose your shirt
Ed Sykota's secret trend trading system