Tuesday, January 31, 2012

The Art of War (Trading)

The legend of Sun Tzu and a walk down Traders Lane
The legendary Sun Tzu wrote The Art of War more than 2500 years ago - in many ways it actually applies to trading:

---Sun Tzu War Quotes As Applied to Trading---
All warfare (--trading--) is based on deception.
According as circumstances (--market conditions--) are favorable,one should modify one's plans (--trading strategy--).
He will win who knows when to fight (--place a trade--) and when not to fight (--place a trade--).

If you know the enemy (--market--) and know yourself,you need not fear the result of 100 battles (--100 trades--). If you know yourself but not the enemy (--market--),for every victory (--target price--) gained you will also suffer a defeat.
If you know neither the enemy nor yourself,you will succumb in every battle (--trade--)

The consummate leader (--trader--) strictly adheres to method and discipline,thus it is in his power to control success (--financial gain--).

In respect of military method (--one's trading method--), we have, firstly, Measurement; secondly, Estimation of quantity; thirdly, Calculation; fourthly, Balancing of chances; fifthly, Victory!!

Ponder and deliberate before you make a move (--a trade decision--).

Do not linger in dangerously isolated positions.

Who Was Sun Tzu?
Sun Tzu (Sūn Wǔ)) was a legendary ancient Chinese military general, strategist, and philosopher.

More Sun Tzu quotes/excerpts without the trading translations but translations from ancient Japanese literature (not necessarily exactly as written or in the same order).:

The art of war is of vital importance to the State. It is a matter of life and death, a road either to safety or to ruin. Hence it is a subject of inquiry which can on no account be neglected. The art of war, then, is governed by five constant factors, to be taken into account in one's deliberations, when seeking to determine the conditions obtaining in the field. These are: (1) The Moral Law; (2) Heaven; (3) Earth; (4) The Commander; (5) Method and discipline.

All warfare is based on deception. Hence, when able to attack, we must seem unable; when using our forces, we must seem inactive; when we are near, we must make the enemy believe we are far away; when far away, we must make him believe we are near.

Hold out baits to entice the enemy. Feign disorder, and crush him. If he is secure at all points, be prepared for him. If he is in superior strength, evade him. If your opponent is of choleric temper, seek to irritate him. Pretend to be weak, that he may grow arrogant.

If he is taking his ease, give him no rest. If his forces are united, separate them. Attack him where he is unprepared, appear where you are not expected. These military devices, leading to victory, must not be divulged beforehand.

When you engage in actual fighting, if victory is long in coming, then men's weapons will grow dull and their ardor will be damped. If you lay siege to a town, you will exhaust your strength.

There is no instance of a country having benefited from prolonged warfare.

Hence to fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy's resistance without fighting.

The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy. To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.

Understand that the other people you are trading with are not really your friends. They may joke with you in chat rooms or forums and you may even share advice however they actually are your direct competition - unless they are your actual trading partner using the same money to trade. Many times in these forums you are talking to a representative of a large hedgefund that wants you to lose and lose badly (unless you actually know them in real life). Believe me I've been walked on many times by people I thought were my "friends". When it comes to money you will find your true friends are few.

By Neal Vanderstelt
Forex Trader, Market Analyst, Trading System Designer
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