The Art of War for Traders

The Art of War, written over 2000 years ago by the Chinese general Sun Tzu contains a wealth of ancient wisdom which has been studied by generals and military students throughout the ages. It also has many profound lessons for traders and investment professionals. In this article, I have taken some of the most well-known quotes from the Art of War and re-worded them to make them applicable to the world of trading and financial markets. 

Self Knowledge 

Of all the Sun Tzu quotes, the one that stands out for many is the following:

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 could be reworded as:

If you know the market and know yourself, you need not fear the result of a hundred trades.
If you know yourself but not the market, for every winning trade gained you will also suffer a loss.
If you know neither the market nor yourself, you will succumb in every trade. 

The key message in this quote is the dual aspect of trading, the battle with the market (The Outer Game), and the internal battle with yourself (The Inner Game).

Most people know, or can learn the Outer Game; the battle with the market, the tangible aspects of trading, strategy, tactics, market knowledge, analysis, risk and money management. However the biggest battle you need to win is the battle with yourself and your ego, the Inner Game.

Traders who have the level of self-awareness, discipline and patience needed to succeed are few and far between. These individuals are better placed to reign in their ego, to remain objectives, to stick to process and to not be distracted by external influences, internal noise and painful emotions. Whilst they will not win every battle, and every trade, they are far more likely to come out on top.

Self-Management 

Self-management is one of the most important aspects of trading but receives relatively scant attention. This quote highlights the crucial importance of self-management, patience and discipline, and cultivating a 'Growth-Mindset’.

The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the enemy is provided by the enemy himself. 

This quote could be reworded as:

The opportunity to secure ourselves against defeat lies in our own hands, but the opportunity of defeating the market is provided by the market itself. 

The key message here is to learn to manage yourself to avoid becoming your own worst enemy. Work on developing a healthy set of attitudes and behaviours, and work on ensuring you focus on maintaining discipline, stick to good practices. Monitor yourself, make realistic self-assessment, track your growth progress, etc. The market will provide the opportunities if you let it, you just need to contain yourself.

Strategy and planning 

Victorious warriors win first and then go to war, while defeated warriors go to war first and then seek to win.

This quote could be reworded as:

Victorious traders win first and then go to market, while defeated traders go to market first and then seek to win.

This echoes some of the previous point, however it  more generally emphasises the importance of strategy, analysis and planning.

Too often traders rush into the market without thinking, without sufficient information or preparation. Successful traders are far less prone to ‘mindless’ trading.

Closely related to this is the quote:

It is more important to out-think the enemy, than to out fight him. 

The enemy is both the market and yourself ( or more pointedly the part of yourself which self-sabotages, your ego).

The market is bigger and stronger than you, and doesn’t care about you. Your ego is also far stronger than your ‘conscious and controllable’ self. (Think of it like a 400 pound gorilla). Whilst the market doesn’t care about you, the ego cares ‘too much’ about you. You cannot out fight either, but you can out-think them. This is why strategy, tactics, systemic thinking and planning are all vital and need to be constantly worked upon. 

Overtrading and Playing to Strengths.

He or She will win who knows when to trade and when not to trade.

From

He will win who knows when to fight and when not to fight.

Few things are more likely to separate a trader from his capital than overtrading. Closely related to this is boredom trading and trading away from your areas of strength. I have coached some traders who have this aspect down to a tee. One of my clients refers to this as the ‘Art of Not Trading’.

Continual Improvement

Even the finest sword plunged into saltwater will eventually rust. 

Reworded as:

Even the finest trading systems plunged into the market will eventually fail. 

This segues perfectly from the previous point. No system, tool, model or method works for ever. Traders need to be constantly looking to improve, update, recalibrate their systems, tools, processes, and market understanding. 

Self-Belief

You have to believe in yourself.

Whilst self-belief is vital in trading, it is not a stable quality. Self-belief ebbs and flows and often is absent just when needed most. Many traders find themself battling with self-doubt ahead of a trade or when trying to stay on plan during periods of excess volatility or drawdown. Yet too much self-belief at other times leads to over-trading, over-sizing and over-confidence.

Cultivating a Risk Mindset.

In the midst of chaos, there is also opportunity. 

It is the very nature of markets which provides opportunity. Markets are a system with an order. However, that order is dependent on so many ‘near random’ variables that the discerning that order is an almost impossible task. Nonetheless it can with great skill be done. Every now and then the order will reveal itself amongst the chaos. The skill of the trader is multiple, they must analyse the system, find opportunities, then work to monetise them.

Summary

There are many great learnings to be taken from Sun Tzu 'Art of War' which can be applied to trading and investment performance on a personal level. I hope you enjoyed some of them, and can take some inspiration from a book, older than the bible itself.

Article by Steven Goldstein 

Steven Goldstein is a Performance, Team and Executive Coach who focuses on Risk and Financial Markets people and businesses.

Core to Steven's work is the belief that everyone has the potential, often latent or hidden within them, to surpass where they are now and to grow into what they want to be. His work as a coach helps people to rediscover that potential, to recognise it, to value it, and to leverage it to be better, happier, and more productive.

Prior to becoming a coach Steven worked for more than 20 years as a Rates and FX trader at some of the world’s leading investment banks. See Steven's Full Profile.

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Trading and 'The Weight of Expectations'

I am moved to write this, by several recent coaching sessions with clients which have touched upon this subject, and which crucially is an aspect I recognise in myself.

‘The Weight of Expectations’

‘The weight of expectations’ is a term which describes the pressure you put upon yourself to succeed.

We all have goals and aims that we believe we can achieve. It is when we fall short however, that we engage in unhealthy reflection, self-judgment and harsh self-criticism.

I’ve witnessed this in many trading and investor clients over the years.

It is not just the expectations they place upon themselves, but also the expectations they believe others have of them. These expectations can create some crazy behaviours, often completely out of character.

We see tangible examples of these in sport: The missed smash at the net in tennis, the 6-inch putt the golfer can’t make, the open goal somehow put over the bar. 

In practice, these are plays they could normally make with their eyes shut. But, with the gaze of the world watching, and the weight of their expectations upon their shoulders, the easiest of chances goes begging. 

One of my favourite tennis players of recent years was Andy Murray. 

Murray was someone who for years was a ‘nearly man’. Nearly making finals, nearly winning tournaments, nearly being great. But he had a major flaw: When Murray screwed up, he screwed up big time.

Murray would be winning a match but would then miss a simple shot, and would then struggle to reover. His 'head was gone'. - Then along came Lendl. 

Ivan Lendl was Murray’s new coach. I do not know what Lendl did to Murray, but suddenly, Murray could now double fault, but instead of folding, he would follow up with an ace. These same errors were no longer disasters: Murray could simply move straight on. – Instant closure. – Somewhere in his head ‘let it go’ was sounding. 

And thus, Murray started winning: Winning championships, winning Grand Slam events, winning Olympic golds. 

Expectations and the 'Trade From Hell'.

I see too many people beat themselves up over the weight of their own expectations. They don’t feel they are good enough, smart enough, patient enough, disciplined enough. They fear they are not learning, not growing, not improving.

I too was like that for many years as a trader,

Recognition of this is good. But recognition alone is not enough.

A trader needs to have a self-management strategies for dealing with this, for parking it, for moving on.

I once had the trade from hell. All traders will have their own personal 'Trade from Hell' at some point. If you have not a trade from hell yet, then it is possible you are not trying hard enough. 

I still shudder when I think of that trade. It was a market call I had got so right, but traded so badly, I had not only missed an open goal at one end, I had managed to put the ball in my own goal at the other end.

I suffered days of hell and anguish after this trade. I could not look another person in the face, let alone look myself in the mirror.

A few days later I decided to write my thoughts and feeling down in my journal. In about 5 minutes I had written down 3 pages of anguish. Then suddenly, as if by magic, the pain cleared, and the fog lifted.

With this exercise I had let what had happened go and moved on. I was no longer beating myself up for falling short of my expectations.

I reinstated the initial trade I meant to put on, even though it was at far higher levels than where I originally intended to buy. Over the next few weeks, this was to turn into one of my best ever trades. – I could never had done that, had I not let go of the weight of expectations I had put upon myself.

Moving on, Valuing yourself. 

If you find yourself burying yourself under the weight of your expectations. Then you need to make changes. You need to recognise what you are good at, and you need to value that.

Do not fall victim for unforgiving expectations you set for yourself. Do not ‘burden yourself’ with your own expectations, let alone the expectations of others.

Set yourself goals and objectives. Set up processes which help you get there. Calibrate and occasionally recalibrate these processes.

You may suddenly find your trading gets better, gets easier, gets lighter. That you start to enjoy it again. You may find you start to value yourself, and see the good and the great in you, that hidden diamond at the centre of your soul which contains all your hidden potential.

I

Steven Goldstein is a leading Performance and Executive Coach and managing director at Alpha R Cubed Ltd.  

Steven has worked as a coach with traders and investment professionals since 2009 with clients across the world. Steven's focus as a coach is on developing the 'Inner Game' aspects of trading performance. 

Prior to becmoing Steven worked for more than 20 years as a traders in Rates and FX at some of the world’s leading investment banks.

See Steven's Full Profile.

Alpha R Cubed work with people and businesses in the financial markets to help them improve and develop behaviours to catalyse stronger and more effective risk performance. Alpha R Cubed run leadership development programmes, coaching programmes for leaders and financial market practitioners, and 'AlphaMind' mindfitness programmes.   

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