I often talk about the Battle Of Waterloo and how it relates to trading in general and specifically strategy development. If you don’t know the battle (which I recommend reading about if you have time), just listen to this once popular country song and you’ll get a sense to why I think this is so important.

While I’m no historian, I do think traders can learn a lot about trading through learning about important battles in history. The Battle Of Waterloo offers a great example as it offers many lessons for us to consider:

1. Make your planning and risk analysis commensurate with the size of your project. For major endeavors, contingency plans are critical.

2. Know when to cut your losses if necessary. Don’t let your desire to succeed be the enemy of good judgment.

3. Be sure that the justification is clear for your project, and that your entire team is sold.

4. Don’t become over-confident, especially after many successes. Remember the basic principles.

5. Never attempt an unpopular endeavor in isolation.

6. Don’t make enemies. You are only as good as your allies.

7. Adopt leader style politics, not the Machiavellian style. Look for the win-win.

Many of these lessons apply to good trading, especially the ones about the importance of having contingency plans, knowing when to cut losses, having clear justifications for your trades, the importance of avoiding overconfidence and finally how important it is to attack from a strong position like having plenty of capital and cash reserves.

Needless to say, every trading strategy has their own weaknesses. So, what the most common weakness I’ve found? That’s easy – human error. That’s right, usually most strategies that have been backtested and proven to work continue to work well unless we do things to either deviate from the plan and/or we apply leverage to it rendering it extremely vulnerable. It is fairly often that I see traders come forward with a hot strategy they’ve used and are in the process of levering it up, creating havoc and exposing themselves to great risk. There is good reason for the expression – leverage always kills. In my experience, that has been true. Beyond that, many strategies are based on things that don’t account for the constantly evolving nature of the market. (more…)