The Art of War and Trading
The markets are a battlefield.
Every day, traders fight to determine the true value of various assets and instruments. And every day, countless new recruits step onto this battlefield, woefully unprepared, and end up slaughtered in the process.
In order to improve your chances of survival, it would be wise to apply some insights from one of the greatest military minds in history.
In this article, we look at some valuable insights from Sun Tzu’s The Art of War and show how you can apply them to improve your chances of emerging victorious in the marketplace.
In war, then, let your great object be victory, not lengthy campaigns.
Wise generals do not fight for the sake of being in a fight, they fight the battles they need to in order to win.
Your goal as a trader is not to be in a trade at all times.
The mission is not to take as many trades as humanly possible or be glued to the computer screen longer than anybody else.
Enter trades because they have a high chance of being profitable, not because you feel like you need to be in a trade.
On the financial battlefield, the victor is not the trader who is in a trade the longest or takes the most trades. The victor is simply the trader who is profitable.
Always remember your ultimate goal as a trader — make money.
Move not unless you see an advantage; use not your troops unless there is something to be gained; fight not unless the position is critical.
Pick your battles. Smart generals fight battles that help them win the war. They do not fight because they are bored or because ‘generals are supposed to fight’.
Just because you are a trader, it doesn’t mean you have to be in a trade at all times. If there is no clear trend in the market, then it is okay to stay out until an opportunity presents itself.
Instead, trade only when setups with good risk to reward ratios present themselves. Look out for trades at critical positions like strong support or resistance levels, where there is evidence of fortified positions where reinforcements are likely to enter the battle.
Doing this consistently should increase your chances of becoming profitable over time.
It is a military axiom not to advance uphill against the enemy, nor to oppose him when he comes downhill.
Don’t fight the trend. An object in motion stays in motion, and a trending asset will tend to continue in the same direction until it meets some opposing force.
If the market is extremely bullish, avoid shorts until you see some signs of a market reversal. In a strong downtrend, avoid going long unless you see some signs of buyers stepping into the market.
If you must trade against the trend, manage your risk by using smaller position sizes.
By learning how to identify the trend, you will be able to pick the trading strategies and setups that best suit current market conditions and give yourself the best chance of having a winning trade.
If you know the enemy and know yourself, you need not fear the results of a hundred battles.
Most traders spend all their time looking at what other people in the market are doing, looking at charts, news, and reports. Yet many of them overlook the most important person who is there for each and every single one of their trades — their own selves.
Analyzing the enemy is not enough, you must also learn to analyze yourself.
Keep a trading journal. Make note of all your trades, and figure out the timeframes, conditions, strategies, and setups that work best or worst for you.
This information will help you see exactly which conditions and markets will help you make money and the conditions in which you are less successful, so you can do more of what works and less of what doesn’t.
The art of war teaches us to rely not on the likelihood of the enemy’s not coming, but on our own readiness to receive him; not on the chance of his not attacking, but rather on the fact that we have made our position unassailable.
At any given point in time, the price can go up, down, or sideways.
The trader’s job is not to predict every market movement, but to position themself in such a way that, no matter which way the market goes, they cannot lose the war.
Instead, make plans, backup plans, and alternate strategies for when things do not go according to plan.
When you are already in a trade, the market can move so quickly that you do not have time to think. If you are well prepared, you will always know immediately what you need to do in any circumstance, and ensure that you either come out with good profits or take minimal losses.
The good fighters of old first put themselves beyond the possibility of defeat, and then waited for an opportunity of defeating the enemy.
When making plans, it is common for beginning traders to focus only on where they can make money and how much money they can make.
It is fun to set profit targets, imagine what would happen if the trade goes your way, and dream of the amount of Lamborghinis you would buy with the proceeds.
The wise trader knows that it is even more important to protect themselves against losses.
Identify price levels or targets at which your position no longer makes sense. Use stop losses and position sizing to ensure that, if the trade does not go your way, you are able to remove yourself with minimal losses and live to fight another day.
But if the trade does go in your favor and the opportunity presents itself, try to secure your initial investment when it makes sense to do so. This can be done by partially closing your position or raising your stops in profit. By doing so, you remove all possibility of defeat and ensure that, no matter what happens, you will not be hurt by this trade.
Do not repeat the tactics which have gained you one victory, but let your methods be regulated by the infinite variety of circumstances.
Stay flexible and always be learning.
The market is always changing constantly. New traders, competing companies, changing regulations, and countless other circumstances can all alter an asset’s price behavior.
Techniques, setups, and plans that worked for you in the past may not work for you again in the future.
That’s why it’s important to keep records of your trades and review them regularly so you can quickly identify any underperforming strategies and replace them as needed.
The financial markets are not a friendly place. It is a battlefield where every trader is out to make a profit.
Those who step onto this battlefield unprepared, lured by the promise of easy riches, will likely suffer terrible losses.
However, if you make the proper preparations, execute your plans calmly, stay flexible, and keep your eyes on the prize, it is possible to thrive on this battlefield and become a profitable trader.
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