The Art of War by Sun Tzu was written in the second century BC.

Sun Tzu was a

high ranking military general, strategist and tactician. The Art of War is commonly
known to be the definitive work on military strategy and tactics. Today, it
continues to be a popular guide for business tactics, legal strategy, and of course,
military intervention.

In short, The Art of War is the science of winning for which the principals can be
applied to any competitive or adversarial situation.

For every trade, there is a winner and a loser. It’s no surprise that day traders
who apply the Art of War principals to their trading endeavors increase their
success rates.

The value of these strategies are self-evident. But perhaps what is missing for
most traders is a full awareness of these strategies or, at the very least, the
dedicated application of them.

As you read through this report, make notes on where you need to take action to
add these strategies to you day trading.

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 The Five Considerations
According to The Art of War there are five factors to consider before marching
onto the battlefield.

These are: (1) The Moral Law; (2) Heaven; (3) Earth; (4) The Commander; (5)
Method and discipline. So, what does these mean to you?

Let’s dig in.

When day trading, we do not command an army on a battlefield. Yet, we do

engage in a competitive effort that we either win or lose. The Art of War can help
us be on the winning side of this effort because it gives us powerful approaches to
be the winner, regardless of the type of battlefield.

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 1. The Moral Law
Sun Tzu: The Moral Law causes the people to be in complete accord with
their ruler, so
that they will follow him regardless of their lives, undismayed by any
danger.

The Day Trading ‘Moral Law’…

To win, you must have the loyalty and confidence of your troops. They must not
doubt or second guess your commands. As a day trader you have five divisions in
your ‘army’ that must follow you commands without delay or deliberation.

1. Your Entry Signal

Too many traders have complex entry signals. They make their signals
complex hoping that they will be able to filter out a bad signal; however
more often than not, what they really end up doing is making the signal so
complicated they are unable to derive a clear go/no go signal. Your army is
asking, “Should we attack?” … and you, the commander doesn’t have a
clear Yes or No.

Clarity and simplicity should be the paramount features of your entry.

Without a clear entry you won’t be able to make a decision in the heat of
battle when price bars are unfolding in front of your eyes. Right or wrong
you need to be able to make a decision quickly and without hesitation.

2. Your Exit
While most traders will spend countless hours honing their entry signal,
they hardly give any thought at all to their exit signal. What to do once
you’re in a trade is almost more important than where/when you will enter
a trade. Here too you need a plan that is simple to follow. One that requires
a minimal amount of discretionary decision making. Remember that when
you are in a trade you don’t have time to think – only react.

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3. Your Risk Exposure
It comes as a surprise to many people that the Art of War is not about
fighting. The goal, in fact, is to avoid fighting and take the enemy and his
country intact, without any loss of life or damage. If fighting is necessary,
then the commander’s job is to keep the risk to a minimum.

A pillar of your trading success will depend on your risk exposure. Make
sure that you never risk more on a trade than you can afford. You must
ensure that you are able to live to fight another day! Even the best traders
in the world suffer losses on a regular basis. Being able to weather these
periods and preserve your capital is what will make the difference between
staying in the game long enough to become profitable or wiping out your
account.

As a rule, you should limit your risk exposure to 2% of your trading capital.
Small account traders may have to risk a little more, but anything more
than 5% of your account is considered too risky and will eventually lead to
busting your account. Large account traders might be able to risk less than
2%, which only improves their eventual chance of success.

4. Your Trading Plan

Your Trading Plan will play a huge factor in your success. Are you planning
on Scalping, Swing Trading or Trend Trading? Deciding this in advance will
make all your other trading decisions easier.

Will you manage your stops aggressively or will you allow a larger stop? Will
you exit on target or will you “swing for the fences”? Will you do a
combination of strategies? These are things you must decide before hand
and will be based on your own personality as well as what you are
expecting from the trade.

Anxious traders or scalpers will be more aggressive with stops and/or take
profit on target. Swing traders and Trend traders will tend to be more
liberal with both. Knowing before you commit to the battle will allow you to
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 focus on, and stick to, your plan.

5. Your Emotions
This is a giant. Your emotions are ‘renegade advisors’. The ‘information’
they bring you will be very compelling – but you must choose only to listen
but not necessarily act on what they say.

As humans we can’t help but get emotional, especially when something as

valuable as our hard earned money is on the line. Emotions can make us do
stupid things. Fear and greed drive the markets, but you must do your best
to stay objective and make rational decisions.

First and foremost you must only use risk money for trading. This is the
same money you would devote to a poker game or money that you could
put in a paper bag and light on fire and only feel a little regret for doing so.
Trading with the mortgage money and/or the children’s college fund is a
sure fire way to ramp up your emotions which will only lead to bad
decisions. ONLY TRADE WITH MONEY YOU CAN AFFORD TO LOSE. Do this
and you’ll be able to keep your head in the game and that will put you
ahead in the game.

Secondly, practice. Whether trading in sim or wading into the arena with
small positions, practice, practice, and practice until you are turning a
profit. The size of the profit does not matter. Turning a profit on a regular
basis does. And there’s nothing like posting a consistent profit to calm the
nerves and boost your confidence.

Tu Yu quotes Wang Tzu as saying: "Without constant practice, the officers

will be nervous and undecided when mustering for battle; without constant
practice, the general will be wavering and irresolute when the crisis is at
hand.”

Only via constant practice will you have your “armies” in complete accord

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with your commands. Make sure all of your “armies” are tuned up and
ready for battle when you trade with real money. Up until that point, you
should trade in simulation.

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 2. Heaven
Heaven signifies night and day, cold and heat, times and seasons.

‘Heaven’ refers the conditions of the battlefield that you do not control.

1. Time of Day / Time of Year: Trading volatility will be high or low depending
on the time of day and / or time of year.

2. News and Announcements: These can create a storm or conversely ‘ideal

conditions’ to win the battle and take money out of the market.

3. Power Failures: Make certain that you have a foolproof way to get a hold of
your broker in the event of a power failure and/or internet failure. This
could be as simple as speed dialing your broker’s order desk into your cell
phone (make sure it’s charged!) or have an old fashioned non-electronic
phone so you can dial out in the event of a power failure. Few things leave
a trader feeling more helpless than being in an open position and not being
able to contact their broker.

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 3. Earth
Earth comprises distances, great and small; danger and security;
open ground and narrow passes; the chances of life and death.

‘Earth’ refers to the actual conditions of the battlefield, including the path to
reach it and return home. Reflect for a moment on this concept when thinking
about the Klondike Gold Rush. Thousands of men boarded boats in Seattle, Wa.
which dropped them at the bottom of the Chilkoot pass – a nearly vertical path of
ice and snow, which then led them to the head of the Yukon River for which they
had to build a boat and then float down it for twelve days before reaching
Dawson City … finally arriving on their ‘battlefield’ – digging for gold. Many
fortune hunters died on the way to the battlefield during the Gold Rush. This is
just one aspect of ‘Earth’ but shows the importance of considering it fully. Yes,
there may be, “Gold in them there hills,” but what will it take to get there?

In day trading, this means considering:

1. Your Choice of Instrument

Choosing the right market can have a big impact on your success. Trading a
market with a high tick value might be sexy but potentially hazardous to a
small account. Not only will you not be able to take a decent position size
but the high tick value can potentially damage your account to a point
where you will not be able to trade anymore. Taking the time to choose the
right market for your account size can go a long way to improving your
chances to succeed.

2. Your Choice of Time Frame

Choosing your Time Frame and Chart Style will also impact your results.
Generally speaking, larger time frames “smooth” the market by filtering out
much of the noise, but the flip side is that like the higher tick values, a time

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 frame that is too large might require you to put too much money and risk
and therefore not be affordable for you to trade.

Likewise, your time frame needs to mesh with your trading style. There’s
not much point in watching a 30 minute chart if you’re attempting to Scalp
the market – you won’t produce enough signals. Conversely, trying to find a
Trend Trade on a 3 minute chart will be difficult because there will be too
much short term choppiness.

3. Your Risk Management Strategy

Once again, it is important to choose a strategy which will be in sync with
your account size. Having a very loose Risk Strategy might be fine if you’re
trading a six figure account; however it wouldn’t be appropriate for a small
account trader. Remember, you never want to risk more than you can
afford to lose on a single trade. Choose your risk strategy and stick with it –
even if it means having to miss a trade or two.

4. The Settings on Your Software

Your Trading Software needs to be in line with your trading objectives. If
you are planning on scalping the Crude Oil market, then you need to invest
in a state of the art trading computer with a high speed internet
connection. Anything less and you’ll get fills too late and with a market that
can move as wildly as Crude that could be disastrous.

Of course not everyone trades Crude, but you’ll want to make sure that
your software and settings are matched to your trading objectives.

5. You Day Trading Rules

Have your Trading Rules outlined and stick to them. Make them simple
enough that you’ll obey them but flexible enough to adjust them if
conditions demand it. For instance, most traders avoid trading during lunch
hour. If this is one of your rules, then stick to it, but if you’re beginning to
notice that the best moves of the day are coming during the lunch hour for
several weeks in a row, then you might need to adjust your rule to
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accommodate the current market condition. This is a rational adjustment!
Your rules are there to protect you, not restrict sound (tested) strategy to
take money out of the market.

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 4. The Commander
The Commander stands for the virtues of wisdom,
sincerely, benevolence, courage and strictness.

You, the Day Trader, are the commander.

Are you wise? Or are you operating out of greed? Anger? Fear? Exuberance?

Are you sincere? Or are you gambling?

Are you benevolent? Or have you become maligned via anger, fear, and greed
making you your own worst enemy – ripe for the kill; a money spinner for other
traders!

Do you ride onto the battlefield with courage? Fear acts as a brake, preventing
you from striking with a deadly blow which is necessary to win. Measured
cautiousness is good but not if it’s rooted in timidity or faintheartedness. True
courage flows from practice and the consideration of all of the above. False
courage is superficial and will quickly put you in the loser’s circle. Be wise! – This
is the root of real courage.

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 5. Method and Discipline
By method and discipline are to be understood as the marshaling of the
army in its proper subdivisions, the graduations of rank among the officers,
the maintenance of roads by which supplies may reach the army, and the
control of military expenditure.

As a day trader, ‘method and discipline’ refers to your day trading system. This
includes your trading methodology and rules.

1. You must create or choose a day trading system suited to your

temperament, personality, capitol that you can risk, and long-term goals.

2. You must formulate your day trading method / rules. These might be
methods and strategies that you first learn from someone else, but you will
naturally modify these to fit your experience, trading style, and whatever
you discover during testing.

3. You must employ good business practices: budgeting, accounting,

financials, tax preparation, research, education and development (mentors,
coaches).

4. You must have a plan for forever testing and improving your system and
methodology in order meet new market conditions and improve the
success rate of your system.

5. You must employ disciplined risk and money management.

6. Be sure to get the latest upgrades of trading software, computer hardware,

and data transmission.

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 The Day Trader Who Wins
When you have the above five considerations in check, you dramatically increase
your odds of winning.

Dig deep into these considerations and perhaps make notes as you answer the
following questions.

 Do you have the ‘moral law’ or ‘ability’ on your side? What steps do you
need to take to ensure that you do?

A successful day trader will use the considerations of ‘heaven’ and ‘earth’ to his
advantage.

 Do you look at the conditions that are outside your control negatively?

This will put you into an unwanted emotional state, clouding your
judgement. Instead, take advantage of the traders who react negatively to
these unpredictable conditions.

 What changes will you make in order to see the things you cannot control
as opportunities for profit rather than negatives?

 Who is the commander? You or your emotions?

Discipline is not about following what others tell you to do. Discipline is giving
yourself an order and following it.

 What steps do you need to take to enforce your self-discipline?

You cannot turn off your emotions but you can choose not act on them.

 Have you tested your trading system (software, methodology, and rules) to
the point that it fills you with confidence?

 What tools do you use to reduce risk and stress?

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To take money out of the market, your “armies” must be stronger than those of
other traders. Look at your armies; the five considerations above. Write out the
areas in need of improvement, attach goals, run your armies through daily
practice and make them strong! By doing so, you will undoubtedly win more
often and win bigger.

 What training do you need?

Set a budget to forever improve your trading through education. Trying to

formulate day trading strategy via trial and error is extremely slow, inconclusive,
and dangerous. Get the help of others to become strong and powerful in the
shortest time. This will bring you greater profit sooner and dramatically reduce
your chances of failure.

Look at the above five considerations and make yourself aware of the things are
working in your day trading. Write them down on a piece of paper, hang it on the
wall beside your desk, and be sure to protect and nurture these positives.

Also make a list of things that are not working. Take the steps to remove these
from your trading and replace them with winning strategy.

Be sure to avail yourself of any helpful circumstances beyond the ordinary

considerations above. Naturally you will discover new considerations that will
increase the profit you take out of the market. “Each to his own considerations” –
meaning that each person will naturally find value in circumstances particular to
them. Know thy self better every day so as to boost your unique ability to profit.

Fixed ideas are the death of any endeavor. While rules and methodology are
there to reduce the influence of emotions and half-baked analysis, do not become
a slave to your method. You must constantly evaluate your method via testing
and make measured improvements when real data supports it. Your trading
system or method will not work in some conditions as it did in the past and will at
times work in other conditions where it previously failed. This is an expected and
inevitable condition that all traders must face. Remember, this is NOT a negative

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but an opportunity for you to profit. Your attitude toward this fact will have a
direct effect on your ability to profit or preserve capitol in these new conditions.
In short, be ready for the unexpected and welcome it instead of letting it twist
you out of shape – be calm, wise, and take advantage!

Here’s another consideration from Sun Tzu.

“When you engage in actual fighting, if victory is long in coming, then men’s
weapons will grow dull and their ardor will be damped. If you lay siege to a town,
you will exhaust your strength. Again, if the campaign is protracted, the resources
of the State will not be equal to the strain.”

Let’s translate this to trading: When you engage in actual trading, you will have
losses. These losses will have direct effect on what you have available for risk and
therefore reduce your ability to attack the market with greater force. The
ultimate goal in The Art of War is to avoid war and take the enemies country
intact and unbroken.

With this in mind, take heed of this quote from one of the most successful traders
in recent times that echoes this consideration:

Where you want to be is always in control, never wishing, always trading,

and always first and foremost protecting your ass. That’s why most people
lose money as individual investors or traders because they’re not focusing
on losing money. They need to focus on the money that they have at risk
and how much capital is at risk in any single investment they have. If
everyone spent 90 percent of their time on that, not 90 percent of the time on
pie-in-the-sky ideas on how much money they’re going to make. Then they
will be incredibly successful investors.
- Paul Tudor Jones

So, focus on NOT LOSING, which is to say, winning does not come from attacking.
Winning is comes from exploiting an error made by your opponent. He either
makes this error on his own or you cause him to make this error. When he does,

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you strike hard and fast, picking up the win. A strategy of attacking and battling
with brute force is out is a sure way to consistently lose. Probably the best
example of this was Ali’s fight with George Foreman in “Rumble in the Jungle.”

Trading is no different. As Sun Tzu says, “All warfare is based on deception.”

Speculative traders in the market are looking to take advantage of how other
traders have been deceived.

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