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Strategy = Religion

Posted by on in Trading Psychology
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Strategy = Religion

 

The definition of religion is; an object, practice, cause, or activity that somebody is completely devoted to or obsessed by. A trader’s strategy is a trader’s religion. In my opinion Mother Theresa is a great role model for all traders because she stuck to her beliefs and nothing could deter her from her path. A trader’s beliefs are formed by strategy and principles that should be religiously practiced, so that nothing can dissuade you from your path to beat the market. I have discussed trading principles in previous articles, now we move on to strategy! First, I will go into the basics of any strategy and lastly I will briefly discuss the most popular trading strategies used by traders.

Amidst blood, sweat and tears; strategy was born. War created what is now widely taught to traders and entrepreneurs all around the world. The greatest strategists in history were generals and victory was their game. In my opinion the greatest strategist to have lived was in Japan during the 17th Century. Miyamoto Musashi, Japan’s most renowned samurai and strategist wrote a famous guide to strategy in 1645 called the “Go Rin No Sho”, roughly translated to “The Book of Five Rings”. This text describes strategy as an art and a beneficial practice, not limited to war. To the Japanese of that era, strategy was something to be used every day. Miyamoto Musashi wrote that, to learn strategy one must:

 

1.      Never think dishonestly

2.      Train every day. (In terms of trading, implies that you must apply and practice your strategy every day.)

3.      Become familiar with every art. (Important, because to traders every art is every kind of strategy.)

4.      Know the ways of all professions. (To traders the different professions are the different financial markets.)

5.      Make a distinction between gain and loss in worldly matters. (This applies to cause and effect of sentiment in the market.)

6.      Develop intuitive judgement and comprehension for everything.

7.      Perceive that which cannot be seen.

8.      Always pay attention, even to trifles.

9.      Do nothing which is of no use.

Miyamoto Musashi wrote that once these nine objectives have been achieved you will cease to be deceived by men and you will realize the wisdom of strategy. The information in brackets is how I apply these objectives to speculation. In addition to this Miyamoto Musashi wrote of “The Gaze in Strategy”, which I believe to be a cornerstone of strategic thinking, this is the ability to perceive distant things as if they were nearby and to have a distanced view of things nearby. This is the equivalent to analyzing the market’s condition before a trade, which is fundamentally apart of strategy in trading. In my opinion, Miyamoto Musashi knew what he was talking about. He is historic testament to success through religious utilization of strategy, I mean he did win over 60 duels to the death, commanded armies in 6 wars and eventually died peacefully a few weeks after the completion of “A Book of Five Rings”. (Harris.1645:49, 54).

Now let’s get our heads out of 17th Century Feudal Japan and into the 21st Century’s virtual reality of speculation. In the financial markets, traders are ultimately searching for that one strategy “to rule them all.” The fact is that there are only three different kinds of strategies, excluding insane methods like trading according to the zodiac. These strategies are:

1.      Breakout Strategies:

This is primarily based on support and resistance lines. This strategy’s name originates from the nature of price action once an asset’s price breaks either a support or resistance line. After the price has passed through the support/resistance what follows is intense volatility and heavy volume to be traded. This strategy ultimately depends on the continuation of the trend for success.

2.      Mean Reversion Strategies:

Mean reversion strategies are based on the nature of a stochastic process to always, over the long-run, return to the mean (Holton,2004:1). Traders use this strategy by exploiting temporary extremes in price volatility by betting on the asset’s price returning to its long term mean. This strategy best suits actuaries.

3.      Arbitrage Strategies:

This strategy involves taking advantage of market peculiarities that are extremely difficult to find. The basics of this strategy entail buying a currency costing less in USD per unit and trading it for another that costs even less in USD per unit (fx-strategy,2011:1) . This applies to FOREX, in Equities the strategy is known as ADR arbitrage. Arbitrage strategies require information often available only to a couple of privileged players. To find more information on arbitrage opportunities go to http://fx-strategy.org/arbitrage-trading.

Once a trader realizes that all other traders rely on these three strategies in particular, the next thing that trader should realize is that there is no perfect strategy. Breakout strategies are useless in a sideways market. Mean Reversion strategies are ineffective in an intensely trending market and arbitrage strategies become of no use as more and more traders desperately try to take advantage of the rare peculiarities, resulting in these loopholes closing. (Schlossberg 2012:16).

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To me, a strategy is like Superman. Superman has his “kryptonite” but without him the world would be doomed. Without a strategy that works for you, your trades will be doomed to fail. What is important for the individual trader to take into serious consideration is to find a strategy that suites his/her principles. The highest chance of success a trader has is when a trade fits his/her strategy and relative principles like superman’s t-shirts fit him. When discipline is applied to strategy, risk is substantially minimized and reward will be common place. This allows self preservation in the markets to become a reality and triumph will be one step closer!

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