Trading Is War! RAMOUTAR REPORT vol.6

To reiterate the disclaimer:

The ignorant and malicious are free to reveal themselves with replies that I will not acknowledge. The inquisitive and intellectually stimulated are invited to post constructive replies, and or questions.

"Trading is WAR!"

“Those who are first on the field of battle will be rested and those who follow will be exhausted. “ Sun-Tzu, Art of War.

That was the beginning of scaling for me. Everyday, I look at the market as a battlefield , I see myself as a general, and my trading dollars as an army. I see each support and resistance zone as an inevitable “hot zone”, a cluster of soldiers ready to attack. When comparing the strategy of war to trading, you’ll see many correlations.

Before any major battle, generals drop in a small, but highly specialized and effective group of soldiers into the area that perform reconnaissance and preparation for the inevitable landing of the army. They are the ones who provide the entries and exits for the general so a battle plan can be developed. Once the information is gathered and a plan has been developed, the army is moved in. We too, seek “intelligence” through our analysis and scanning of the markets. Our analysis is secondary to how we interpret it and execute our actions.

No general, except for Custer perhaps, has exposed an entire army to massive or unknown risk. Every challenging battle ended in success for the general that “scaled” his army into battle. When victory is imminent there are less groups and larger masses concentrated to a smaller number of areas, since the likelihood of defeat and or casualties have been minimized. As price action heads into support or resistance (the primary areas of battle), I establish a “smaller” position (on the battle field early), and then I watch the battle as the casualties of other armies are expended. Once I’m pretty certain of the battle’s outcome (trend), I advance my armies (increase my position). By sacrificing a smaller number of troops, I not only minimize my exposure, but I’m able to collect intelligence from the battlefield.

After entry, stop and target are predetermined, the next question is how much exposure will be used in the battle. A simple assessment of the risk reward ratio (after I have scanned) tells me what the likelihood of casualties (losses) will be, and whether or not victory in that battle, and the ability to fight another day can be achieved, while preserving the majority of the army. In essence the question, is the risk of loss outweighed by the potential of profit?

When I scan I always find marginal setups, and many times the reward potential is too great for me to pass up, in spite of the fact that the risk reward ratio may not fit my plan. To compensate for this, I added another component to my trading plan, the “exposure table”. Here’s an “example”:



Again this is just an example. The amount and scalability of the shares depends on the trading plan and position concentration. By using a table, I establish a position in these questionable setups with a smaller position size. If the trade goes against me, I have fewer casualties. If the trade begins to bear fruit I add to that position accordingly, not exceeding my maximum exposure for that trade. Averaging up on a long, and averaging down on a short allows me to continue adding to a position that maintains its trend. I must admit that in the beginning, I had a very tough time doing this since it was counter intuitive to buy more where I thought I should exit. After a while, I found that not only did this further refine the money, risk and trade management portion of my trading plan, but it really did wonders for my greed and fear. I satisfied the fear element by using a small position, and the greed was addressed because I had a position early on, and I have the option to add to it. For example, if the position went against me, I would lose $100 instead of $1,000. My trading became much more relaxed. If it began trending the way I wanted, I would add to the position and my average price was always better than the price I would get by closing the position out at the market price.

You may want to consider adding this to your plan, or revising it. The table will allow you to position yourself in the “marginal” plays, having them prove themselves, while limiting your risk exposure. The biggest challenge of course will be having the discipline to follow it.

May the trend be with you!

Previous reports:

Volume 1 – “Fear and the Market”

http://www.elitetrader.com/vb/showt...&threadid=19559

Volume 2 – “Switching TimeFrames”

http://www.elitetrader.com/vb/showt...&threadid=19881

Volume 3- “Elements For Successful Trading”

http://www.elitetrader.com/vb/showt...?threadid=20208

Volume 4 – “What Are YOU Looking At?”

http://www.elitetrader.com/vb/showt...=5&pagenumber=1

Volume 5- "Building a Trading Stable"

http://www.elitetrader.com/vb/showthread.php?s=&threadid=20510

 

Agree about the r/r and scaling - good stuff..

But don't all the "Trading is war" analogies just pump up the testosterone for the average newbie (aspiring "billionaire genius") trader? Leading to emotional decisions, bad stuff..

My 2c.. Let's not make it sound more heroic than it is.
WW2 = epic battle, Daytrading = pretty ordinary way to make a living (if you are doing it right )

 

I couldn't get to some of the other links you posted, mainly vol 1 and 3 are the links wrong or is it just me ?

 

Lets not be too literal here.

Its a metaphor and one that works if you realize that just beyond any harmonious trading you may be relishing is a land mine (internal or external) that can kill or cripple your trading capital.

War and trading both require supreme focus on survival first and foremost.....

 

Perhaps war was not the best metaphor. I have several relatives and friends who are veterans, a couple of them trade for a living. During my conversations with them they have used the "strategy" in war, not "war" metaphorically when talking about trading.

I began looking at the parallels of military and trading strategy when one of my mentors, a retired head of market making at GSCO shared it with me. He's a WWII vet and one of the best traders I have ever seen, and taught many of today's best head market makers.

The only intention in this post was to share scaling techniques as they apply to trading and money management strategy. I'll hire an editor. Other than the war aspect, hope you enjoy.

 

i cant get up your previous posts. could you try and replace the links. i dont think they are working.