As a trader you must have three pieces working in synch. Your equipment, your trading tools, and your mind. The Art of War by Sun Tzu is a book that has been applied to every facet of human experience. While originally meant to be a book that taught war strategies the lessons it imparts can and will change your life.
Students of the market are constantly battling between the emotions of fear and greed. The Art of War can help you cut a path between these two emotions and lead you to a mental place that will constantly help you put your best foot forward. In this series I will address various poor trading habits by excerpting and interpreting various passages. While my interpretations are not meant to be definitive by any stretch of the imagination my goal is to get you thinking.
They say the game of golf is not played on the green, it’s played between your two ears. Trading futures, forex, options, or stocks is much the same way. Your mental game must be up to par. If not, failure is inevitable. In the end I hope you find the discipline to be a speculator and not just your ordinary gambler.
Book 6 : Fortitude and Frailty Pg. 52
“A large force cannot necessarily overpower a smaller force … If the small force is adequately organized it can wreak havoc upon the slowness of the larger army. These are called hit-and-run tactics. “
You are the “small force” battling it out in investment markets valued in the trillions. By focusing and concentrating your efforts in a handful of markets, with optimum opportunities for success, you have the ability to utilize “hit-and-run tactics”. This is the only way to become profitable. You have finite capital, finite time. So the question becomes will you let your opportunities overwhelm you or will you take control of your fear and greed? While it will take trial and error if you take your time and do your research to operate like the hedgers “large group” you will be rewarded.
I teach my clients how to use accumulation/distribution, open interest, volume, and the commitment of trader’s report to see the patterns evolving from the hedgers and larger speculators. These two groups develop their positions over long periods of time. Therefore, they are always telegraphing their position. The goal is to use their superior strength in your favor by catching the waves that they initiate and moving with the ebbs and flow of the market by using sound risk management techniques.
Book 7: Manipulation of Circumstance Pg 57
“Manipulation must be employed as deception/no-deception… Deception/no deception means you proceed without preconceived notions of victory or defeat. This is accomplished by proper planning.”
The majority of traders come to trading undercapitalized to fulfill their vision. Many have caviar dreams with only Big Mac money in their pockets. It quickly becomes clear that in order to succeed as a trader you must manipulate all of the various opportunities in front of you.
The trick to that is being able to apply money management, technical analysis, and risk management techniques together in order to be a complete trader. When I work with clients I teach them how to utilize synthetic options, collars, and retail hedging techniques in order to be able to trade both sides of the market, while protecting as much capital as possible. This is part of the proper planning that you need in order to have an edge in the markets. Even with all of these tools at your disposal you must still approach each new opportunity with fresh eyes. A trader’s greatest asset is his ability to set aside the psychological need to be right so he can be profitable.
Book 7: Manipulation of Circumstance pg 61
“The spirits of most warriors, with rare exception, vary with time. In the morning a warrior is filled with vitality and seeks to do battle, in the afternoon he may tire if the expectancy of combat has not been fulfilled, and in the evening he will long for home and seek to be there instead of being on the field of battle.”
Understand what types of trading works best for you “spirits of most warriors… vary with time” If you find yourself hitting a brick wall with your active trading don’t be afraid to move to swing trading or position trading. The contest is not how often you trade it’s how profitable you can be. Play around with different time frames for different markets. Don’t get caught into the falsehood that there is only one way to trade futures or forex.
I am going to let you in on a secret. If you are trading spot currency, futures, or options on their own you have cut your slim chances of success to none. Don’t get me wrong, you will have winning trades, but it will only take that one trade, that unexpected trade, to wipe out everything you labored to build.
Book 4: Tactical Dispositions
The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy.
Why were futures created? If you know the answer then you are ten steps ahead of average futures trader out there. If you actually use what you know you are most like one of the 5% of traders that succeed when it comes to trading futures and forex. You can stop reading this article now.
For the rest of you what I am going to write may or may not register right away, that’s okay. I want you to meditate on it, research it, and email me. I remember when I wrote that gasoline would be $4 at the pump a few years back and people wrote me all sorts of hate mail. Since then gasoline has $4 at the pump in various states.
The big secret is quite simple. Futures investing was designed as an insurance tool. That’s it. The spot market, the futures market, and the option market were designed as a daisy chain of protection, each with a successive higher and higher leverage, because of the markets perceived belief that the buyers and sellers actually own the product or have the cash to pay for the product in whole.
When I first decided to become a commodities broker I thought that I would be learning how to trade. I assumed that the test would discus technical analysis and market strategy. Imagine my surprise to discover that the test was all about hedging. How farmer’s protect themselves from loss in crop value, how banks use treasury futures to manage interest rate fluctuations, and how to protect yourself from currency devaluation. Dry stuff.
To secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself.
That kernel of information didn’t mean much to me when I was 19. My goal was to pass the test. As time went on and I began trading for my lcinets, and eventually for my own account I realized a simple truth. Gambling and speculation were two different things. To gamble with futures meant I was looking to be right about being long or short. To speculate meant that I was protected even if I was wrong. Like everyone else I thought stops were the definitive risk management tool. That’s when it occurred to me if the markets were designed to be an insurance vehicle for the commercials, would there be an advantage for the retail investor.
By looking at trading through the eyes of the people that actually buy and sell the products you are able to trade both sides of the market, with a little foresight, and manage your risk more efficiently than using stops alone. By combining spot, futures, and options products together you are able to raise your level of trading sophistication to the same level as the true professionals.
Security against defeat implies defensive tactics; ability to defeat the enemy means taking the offensive.
Depending on your level of trading sophistication you may not be comfortable using spot, futures, and options either because of commission costs or level of understanding. While it may take a little time to understand the risk management parameters, delta of options, and calculating your total profit/loss scenarios, once you have mastered it you raise your trading from the amateur level of gambling to true speculating. They feel that they are only paying twice as much in commissions plus locking up the premium.
The great part of trading this way is that you will have reduced margins, reduced commissions, and reduced risk. Don’t be afraid to combine spot, futures, and options together it will add a depth to your trading that will put you ahead of the 95% of the traders that fail.