The Art of War
Sun Tzu was a military genius who wrote a classic treatise entitled The Art of War. The principles in this ancient text are relevant whether you are planning a military coup, aiming for success in the boardroom, or desire to excel as a trader. The fact that his ideas were expressed approximately 2500 years ago ensures that these concepts have stood the test of time. Let’s have a look at some of his key concepts and apply these to assist our trading results.
- "Possessing the ability to calculate the difficulties and danger is a basic requirement for a good general."
Your number one goal in the market must be preservation of capital. If you have not evaluated the risks involved, you should not take the trade. Effective money management skills allow you to quantify the worst-case scenario before engaging the market. - “To be prepared beforehand for any contingency is the greatest of virtues." The degree of success depends upon the extent of planning for the anticipated victory:
- Meticulous planning - Before engaging in battle, you have already won the war.
- Careless planning - Before engaging in battle, you may have already lost the war.
- No planning - Your defeat is certain."
- “You need to strengthen yourself and prepare yourself mentally to be the target of attack.” "Know the enemy and know yourself and in a hundred battles, you will never be in peril."
The more knowledge that you can muster about the market, the more likely you will be to succeed. Trading favours the strong of mind. - “Those who carefully calculate their strategies will be led to victory. Those who carelessly calculate their strategies will be led to defeat.”
One of the key trading strategies is to let your profits run, and cut your losses. Unfortunately, the majority of traders have this rule around the wrong way. They become risk-seeking when faced with a loss, yet risk-averse when a trade is profitable. Sometimes the old wives tale of “you'll never go broke taking a profit” or “leave some thing on the table for the next person” comes into play, and they exit the trade pre-emptively. It is difficult for traders to obey the rules of trading because their own psychology often defeats them. - “Within the universe, there are no eternal conquerors”.
You are only as good as your last trade, so the killing you made in the tech boom is no longer relevant. Even the bravest among us have learned that “Out of orderliness comes chaos. Out of courage comes cowardice. Out of strength comes weakness.” You cannot afford to let your guard down, or you will suffer the consequences. - “When the victory is not certain, adopt defensive tactics. When the odds for victory are overwhelming, adopt offensive tactics.”
One of the key premises practiced by effective traders is to ‘trade with the trend’. If we are experiencing a bear market, this requires different tactics in comparison to bull market strategies. Make sure that your trading is consistent with the overall market environment.