Trading Lessons from The Art of War

Trading Lessons from The Art of War
Revered the world over for centuries as the essential text for warfare and battle by the ancient philosopher and general Sun Tzu (544 BC–496 BC) explains the principles for dealing with war, personal conflicts, and achieving success in the battles of life.

Here are ten principles I believe we can translate to trading the markets.

“Appear weak when you are strong, and strong when you are weak.” – Sun Tzu, The Art of War

The markets can defeat us when it appears strong when it is extremely overbought and due for a reversal or it appears weak but is extremely oversold and due for a bounce. When a daily chart is at the 70 RSI, 3rd upper Bollinger Band, or 3rd upper ATR Keltner Channel it may appear strong but the odds are it is weak and ready to reverse lower. When a daily chart is at the 30 RSI, 3rd lower Bollinger Band, or 3rd lower ATR Keltner Channel it may appear weak but the odds are it is strong and ready to bounce.

“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.” – Sun Tzu, The Art of War

A trader must know both their own weaknesses and strength and their trading system’s positive expectancy thoroughly. If you are self aware and know how your system works you don’t need to stress over the results of your next 100 trades.

“The supreme art of war is to subdue the enemy without fighting.” – Sun Tzu, The Art of War

A trader should not be trying to beat the market they should be going with the flow of price action.

“Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.” – Sun Tzu, The Art of War

Don’t talk about your positions and don’t try to make predictions and have strong opinions, just trade your strategy with focus and discipline and make money quietly.

“Supreme excellence consists of breaking the enemy’s resistance without fighting.” – Sun Tzu, The Art of War

Don’t fight trends that are taking place only enter at the moment of a new break out of a range.

“In the midst of chaos, there is also opportunity” – Sun Tzu, The Art of War

Extreme market moves and volatility can create some of the best trading opportunities.

“Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win” – Sun Tzu, The Art of War

Profitable traders first win by backtesing, doing historical chart studies, and creating a trading system with a positive expectancy model, then they start trading real money. Unprofitable traders just start buying and selling based on random opinions and hope to make money.

“Engage people with what they expect; it is what they are able to discern and confirms their projections. It settles them into predictable patterns of response, occupying their minds while you wait for the extraordinary moment — that which they cannot anticipate.” – Sun Tzu, The Art of War 

Find repeatable patterns in the price action of the markets that you can use to create profitable trading signals for.

“Opportunities multiply as they are seized.” – Sun Tzu

A larger watchlist of stocks and markets provides more opportunities for profitable trades across additional charts if they backtest well. 

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

There are five essentials for profitable trading:

  1. There is a time to trade and time not to trade, you must know the difference to make money. 
  2. A trader must know how to trade in different types of markets, uptrends, downtrends, sideways, and volatile. 
  3. A trader must not let their emotions be moved to lose discipline by euphoria after wins or depression after losses. 
  4. A trader’s primary job is to have the patience to wait for their signals and not chase price action. 
  5. That trader who can follow their profitable system without being led astray by their ego or emotions will find success.