Trading Reports

How Military Strategy Improves Trading Performance: Sun Tzu Style

Sun Tzu wrote The Art of War over 2,500 years ago, which is arguably the best military strategy book ever written.

John Boyd, another great military strategist, expanded on many of Sun Tzu's principles.

In this 'PTC Trading Lesson Special Report' I'm going to bullet point key principles from the works of Sun Tzu and relate them back to trading.

Understanding these principles will help improve trading performance.

1. Sun Tzu - “All warfare is based on deception. Hence, when we are able to attack, we must seem unable; when using our forces, we must appear 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.”

All trading is based on deception by the 'smart money' and in the Wyckoff methodology known as the Composite Operator. They constantly endeavour to confuse and deceive weak hands, who do not understand how the 'game' is played.

2. Sun Tzu “Thus we may know that there are five essentials for victory:
- He will win who knows when to fight and when not to fight.
- He will win who knows how to handle both superior and inferior forces.
- He will win whose army is animated by the same spirit throughout all its ranks.
- He will win who, prepared himself, waits to take the enemy unprepared.
- He will win who has military capacity and is not interfered with by the sovereign.”

First point is the most applicable to trading success. Knowing when to trade and when not to trade. In essence, having a clearly defined process followed with discipline.

3. Sun Tzu “who wishes to fight must first count the cost”

In trading you're not going to be right 100%... although naive beginners might think they will. One should always consider the risk of each trade prior to entering a trade.

4. Sun Tzu “If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

This is a key point to knowing yourself and your trading plan and also who you are up against and that you will not be right on every trade. Therefore, you understand the distribution of odds (variance) and need not fear the outcome of any individual trade. If you have no trading plan and don't understand the 'rules of the game' as the smart money plays it, you're bound to lose.

5. Sun Tzu “One mark of a great soldier is that he fights on his own terms or fights not at all.”

Great traders don't force trades. They have developed 'sit out power'.

6. Sun Tzu “If the mind is willing, the flesh could go on and on without many things.”

This reminds me of a quote from legendary trader Ed Seykota "everybody gets what they want from the market". Are you willing to follow your trading plan with discipline and execute it to the best of your ability? Or are you ready to give up at the first hurdle? (several losing trades)

7. Sun Tzu “Ponder and deliberate before you make a move.”

This idea helped me generate the question of "is the structure an 8/10 or greater and is the entry candlestick / volume an 8/10 or greater?". If no to either, do not take the trade. Ponder, deliberate, take optimal trades.

8. Sun Tzu "invincibility lies in the defence, the possibility of victory in attack".

Without proper risk management (defence) you will not achieve great trading results.

9. Sun Tzu “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.”

Is this an optimal trade that is going to help you achieve your trading objectives?

10. Sun Tzu “Water shapes its course according to the nature of the ground over which it flows; the soldier works out his victory in relation to the foe whom he is facing.”

This reminds of the Bruce Lee quote "be water, my friend". It's important to analyse the price structure without pre-conceived notions. Instead you should have no prior view and analyse the structure (supply and demand) for exactly what it is and what it is telling you.