Ready, AIM, fire - The lessons all investors can take from "The Art of War" (Part 1/2)

By Patricia Miller

Feb 07, 2020

War

I read The Art of War several years ago. It’s a book that is said to be a common read for executives and sports athletes, and whilst I am neither of those I have always been fascinated by military history and tactics.

Whilst not specifically a book on trading, there are many points in the book that can be adapted to trading. It’s a book with timeless wisdom for all disciplines, and I would suggest to read it.

Here are some lessons that all traders can learn from the military strategy classic:

“In the midst of chaos, there is also opportunity”

A trader thrives on chaos. When people become emotionally involved, they make irrational decisions. Like piling into stocks 100% up because they saw on a bulletin board that it was going to £1.

This volatility offers an opportunity to pick up lunch money from those who aren’t prepared or do not even have an idea of what they’re doing.

In the small cap market, much of the volume is retail investors and traders. Some of these will be highly prepared and well researched individuals, and some of them will not.

Greed and fear have always played a part in the stock market, and so long as humans participate in stocks, then it always will. This can be exploited for your own advantage.

“So in war, the way is to avoid what is strong, and strike at what is weak.”

For those who trade breakouts, the whole concept is to buy at the point of least resistance. If both resistance and the offer is 400p and no number of buys are shifting the price, then why would we offer ourselves up as liquidity for the seller? No thank you.

Whilst overhangs do offer opportunities to load up for an extended move once the seller has cleared, when trading breakouts we avoid strength, and strike at what is weak.

“If ignorant both of your enemy and yourself, you are certain to be in peril”

Many retail traders and investors are ignorant of their enemy – the market. They do not fully appreciate or understand the risks involved in investing, and therefore are blind to the true dangers that the stock market presents.

Not only are they ignorant of the market, but they are also ignorant of themselves. This is dangerous, because huge amounts of money are often lost when people panic and freeze. Without an exit strategy, losses become bigger and bigger until they are too painful to bear before being sold – booking a hefty loss. Trading too big in one position is bad for one’s psyche and also physical capital.

“Move not unless you see an advantage; use not your troops unless there is something to be gained.”

This quote is a good paraphrase of having an edge. Unless we have an edge in our positioning and movements, why would we fight or trade? It is silly to commit capital unless there is something to be gained – and there is nothing to be gained if we don’t have an edge.

Author Michael Taylor’s website www.shiftingshares.com contains a number of tutorials on how to trade and invest as well as his free book – ‘How to Make Six Figures in Stocks’.

Important Notice And Disclaimer

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.