SUN TZU AND THE ART OF STOCK TRADING PATIENCE

Learn how 10 is Greater Than 90 with The Crosshairs Trader's new eBook. Get your copy today!

“THERE ARE ROADS WHICH MUST NOT BE FOLLOWED, ARMIES WHICH MUST NOT BE ATTACKED, TOWNS WHICH MUST NOT BE BESIEGED, POSITIONS WHICH MUST NOT BE CONTESTED, COMMANDS OF THE SOVEREIGN WHICH MUST NOT BE OBEYED.”  SUN TZU ART OF WAR VIII.3

Why does SUN TZU go into such detail here about what NOT TO DO?  Is it just semantics?  I think not.   I believe SUN TZU is wanting his listeners to know that in battle patience is just as important as the attack itself, if not more so. 

Th quote above is taken from the chapter entitled VARIATION OF TACTICS, which, in military terms, refers to the techniques for using a combination of weapons in various situations for defeating the enemy.  One of the general’s, and the trader’s, most effective weapons is patience.  Simply put, there are trades that should not be entered, stocks that should not be traded, markets that should be left alone,  areas of strong defense that should not be challenged, and restrictions placed on the commander himself.

THERE ARE ROADS WHICH MUST NOT BE FOLLOWED

There are trades that should never be taken no matter the set up.  If your trade decisions are based on technical analysis as mine are, you patiently wait for the trade to set up, then you enter the trade as planned.  When you are given a signal you trade.  However, there are times when you are given a signal and you decide to patiently wait for the next signal.  Why?  Because the proper use of tactics implies a combination of weapons.  Profitable trading systems are not designed to work in a vacuum, which can help explain why a handful of traders can take just about any trading system and make money whereas most others consistently lose money trading the same system!  The successful trader knows that factors other than the technical contribute to the success of their system.  These factors include knowledge of the following: the general market condition (TERRAIN),  the strength of the sector traded, the upcoming major market moving news events (such as FED statements, economic announcements, etc.), and the earnings date for the stock you trade, among others.  We should all patiently wait for our set-up with the understanding that the set-up itself may have to wait.  There may be dead ends but there are other roads to take.

ARMIES WHICH MUST NOT BE ATTACKED

I learned eary in my trading career that I could not be all things to all markets.  The very best traders focus on one market or one pattern or one style of trading.  Ask T. Boone Pickens how to trade Apple and he would not have a clue, but ask him how to trade oil with his billion dollar bank account and he may just be able to show you a thing or two.  I bet you Bill “the bond king” Gross knows little, if anything, about trading FOREX.  Why should he?  He has made his money focusing on the bond market. I have learned that I cannot trade the OEX (the S&P 100 index).  I simply lose more money than I  make.  I am a consistent loser when I trade the OEX.  I cannot trade it so why try?  The OEX is an army that I choose not to attack.  Instead, I focus on a relatively small army of stocks from various sectors and I wait for one pattern to trade–a pattern I developed that suits my style of trading and my risk level.  It takes patience to focus your energy on one market, one pattern, or one style but this focused patience will pay off in the long run, just as Mr. Pickens or Mr. Gross.

MARKETS THAT SHOULD BE LEFT ALONE

I recently wrote a series of posts on BATTLEFIELD TERRAIN, wherein I discussed SUN TZU’s different battle terrains and the best method for trading each.  Suffice it to say general market conditions vary and each has varying degrees of opportunity depending upon your style of trading.  My style of trading, best understood as swing trading, requires that I focus on trades that have the potential to move to my profit target within 1-5 days.  Otherwise, it is best that I stay off the battlefield.  Instead of changing my style to meet the market, I patiently wait for the market to meet my style.  There is a constant opportunity in the market; however, that is not the same thing as saying that you can capitalize on every opportunity.

AREAS OF STRONG DEFENSE THAT SHOULD NOT BE CHALLENGED

Japanese candlestick charting (which I use) teaches that there are common reversal patterns that when used in conjunction with other indicators provide highly probable and profitable trades.  Notice that I said “when used in conjuction with.”  This is very important in finding the areas of possible support and/or resistance in the market where possible tradeable reversals are in order.  Candlestick charting confirmation requires patience.  In other words, it is not enough for me to have a DOJI on a chart after a long sell-off and automatically place my trade to go long.  Instead, I look for other signals to confirm the candlestick pattern such as my indicators, stong support/resistance areas, moving average lines (TANKS), volume, etc.  then patiently wait for the candlestick chart itself to signal a reversal, which usually takes 1-3 days and enter accordingly using smaller intra-day charts. Jumping the gun in anticipation of a reversal is a trading error that should be avoided at all cost.  The price you pay is patience. 

TRADER RESTRICTIONS and THE ART OF WAR III, 18

There are circumstances when all the charts are lined up according to plan, all the indicators and candlesticks have given confirmation, the battlefield terrain is suitable for entry, and the instrument traded is ready for deployment and, yet,  the best choice for action is inaction. You simply walk away from the trade.  My style of trading provides 3-5 opportunities per week and that is it.  When I try to force a sixth or seventh trade I usually lose money.  I have also found that when I enter or exit a trade it is best that I walk away from the computer for several hours.  Walking away after entering a trade allows my trade to work without interference from the noise of the smaller charts or interference from a full range of emotions that can easily talk me out of staying in a potentially profitable trade.  Walking away after closing a trade keeps me from jumping the gun for the next trade as a result of over confidence from the last profitable trade or revenge trading due to a loss in the last trade.  Knowing yourself is just as important as knowing how to trade.   As SUN TZU says, “If you know the enemy and know yourself, you need not fear the result of a hundred battles.” 

In trading the “how to” is very important but the “when to” is even more so.  The “how to” can become our enemy when the “when to” has not been properly considered for “if you know neither the enemy nor yourself, you will succumb in every battle.”   There are enough enemies on the trading battlefield so why make it even more difficult by having to fight yourself?

Related posts:

1. CROSSHAIRS TRADING AND REPEATABLE PATTERNS CONCLUSION: Waiting for one pattern to repeat itself over and...
2. CAN MISSING A STOCK TRADE BUILD CONFIDENCE? The question you must ask yourself is: 1) did you...
3. STOCK TRADING IN A “HAPPY ZONE” The secret for Ted Williams and for you as a...
4. THOMAS BULKOWSKI AND THE FAILURE OF POPULAR STOCK TRADING PATTERNS         According to Thomas Bulkowski, a popular...
5. TRADING CONFIDENCE AND THE CROSSHAIRS BATTLE EXIT LINE The battle exit line will not deceive you into thinking...