Samurai Trader's Email Digest Issue # 28 March 27, 1999
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Welcome to the Samurai Trader's e-mail Digest. This BIMONTHLY digest
features questions from readers of the book, Zen in the Markets. Answers
are provided by the book's author, Edward Allen Toppel. Investment or
trading questions unrelated to the book will also be considered. Last names
and email addresses of those submitting questions are not listed so that
total confidentiality is maintained. For details, visit
<http://www.samuraitrader.com>
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TABLE OF CONTENTS
*Moderator's Comments
DOW 10,000 CONTEST
*This Topics of this Week's Questions
1. Who has the edge??
2. What you see is what you get, maybe!
3. Soft Markets Principles
Guest Contributor's Column
* Chapter 11 ( Nine Circumstances - ( Survival Tactics )
from Dean Lundell's book
"Sun Tzu's Art of War for Traders and Investors"
*Closing Thought
Failing Successfully
______
MODERATOR'S COMMENTS
Fellow SamuraiTraders,
I' ve decided to have a little test of your understanding of my philosophy. The Dow is again
within striking distance of the 10,000 level after flirting with that mark this past week. I'll give
a prize ( not yet determined by me) to the person who gives the best answer to this question:
When will the Dow close above 10,000?
Please submit your answer by midnight, Monday March 29th.
THIS WEEK'S QUESTIONS
Q.#1
Eddie,
Who has the edge in the SPooz...the off the floor trader or a trader in the pit.
And, what is a seat rental going for these days in the SPooz?
Thanks, Don E. from Winfield Kansas
A.#1
Don,
Both. You asking how that can be? It all depends what you mean by the edge.
The floor trader has less operating costs (commissions are very low) and so can afford to trade
more frequently. That's an edge for sure. Most floor traders are short-term scalpers, just taking
a few ticks out of a trade and then going on to the next one. Their switch parameters are much
closer. one negative of being on the floor is that is very easy to get caught up in the emotion of
the moment.
An off-the-floor trader (screen trader) has a longer perspective and usually holds winners much
longer. Some of the most profitable traders I know are off-floor.
You'll always have the edge if you are doing the right thing. No EGO!!
*
Q.#2
Eddie,
I have been trying to figure out options. Tough job, huh. I was
hoping you could give me your opinion to my question.
When buying a leap, which is the best cost effective strike price to get
into the position, deeper in the money paying less premium or near the money with
more premium? For example, to buy the zdeai (Dell 2001-45's @ 46) or the
zdeap @30?
Thanks,
Dennis S. from ??? (Please let me know where you are from when asking questions)
A.#2
Dennis,
Like everything else, you get what you pay for. A deep in the money gives you a big bang for
your buck. The further from the money, the less ride you get from a move until it enters the
money.
Anybody else out there want to comment on this one?
*
Q.#3
Ed,
I'm looking at the major and soft currency markets at the moment. Should I approach these
markets any differently? What advice would you give for someone who's starting out with these
markets?
mario3
A.#3
Mario3?,
My main concern is liquidity. The same principles of trading apply. You'd probably have to
have a longer term perspective but still need to observe the exit rules that you have established.
Trading is trading. It really doesn't matter which markets you trade as long as you stay in the
flow.
Eddie
*****
GUEST COLUMNIST
Guest Contributor: Dean Lundell from his book
"Sun Tzu's Art of War for Traders and Investors"
published by McGraw-Hill 1997
Chapter Eleven
Nine Circumstances - ( Survival Tactics )
Sun Tzu said that in the art of war, there are nine types of ground: Dispersive
ground, facile ground, contentious ground, open ground, intersecting ground,
serious ground, difficult ground, hemmed in ground and desperate ground.
For the trader or investor, this means recognizing the circumstance you find
yourself and the market in and choosing whether to do battle or not.
Sun Tzu said dispersive ground is when local chieftains fight amongst
themselves.
Therefore, fight not.
This typically occurs, for example the day or two prior to a big economic
report or expected event. It is usually characterized by periods of quiet
followed by periods of very choppy price action and flurries of activity. This
is when locals and market makers are trading amongst themselves. For the
small independent trader, to take positions in this type of market can be
hazardous to your account equity.
Sun Tzu said entering other's land but gaining no great distance is facile
ground.
Therefore, halt not.
This is taking the small position. As it goes for you, add to it. If it does not,
you can get out easily without much harm.
Trading, or investing is about probabilities. Let's suppose you spot an
opportunity. If you place a large order and are wrong, the results will be
disastrous. If on the other hand, you place a small order and are wrong, you
can get out without much harm. If you place that small order and are correct
in your assessment you then add to it.
Professionals average up, amatures average down.
Sun Tzu said that ground that is of equal value to either side is contentious
ground.
Therefore, attack not.
When large market participants are of opposing views, market activity is
typically extremely volatile with high volume and large trades. For the small
trader it is quite risky to get involved in this conflict.
Sun Tzu said that ground on which each side can come and go easily is open
ground.
Therefore, do not attempt to block the enemy's way.
An open ground market is a freely flowing market. Activity is good but price
swings are smooth and go freely from support to resistance areas. This is the
type of market that is easy to trade if you just go with the flow.
Sun Tzu said that ground which forms the key to three states so that he who
occupies it first has command of the empire is intersecting ground. Therefore,
join hands with allies.
This is the situation where something has got to give. The market is searching
for leadership. In equities it will be a particular group. In debt it will be a
particular portion of the yield curve. In currencies one in particular will lead
the rest. Take small multiple positions in each and then quickly add to the
leader when it becomes evident.
Sun Tzu said that when an army has penetrated deeply into anothers territory,
this is serious ground. Therefore, gather in plunder.
Let's say you have done everything right. You got in early, you added to your
winning position and now the market is really starting to panic and move even
more in your direction. This is when you go for the throat. Add even more to
your position, then keep offering your position at ever better prices to you to
liquidate your position.
Sun Tzu said that ground that includes mountains, forests, steep terrain and
marshes is difficult ground.
This is the narrow, choppy, inside day. Best to leave it alone and not trade.
Sun Tzu said that desperate ground is that on which we can only be saved
from defeat by
fighting quickly without delay. Therefore, fight.
This is when you are the guerrilla trader. You go in for quick stabs and get
out.
A particularly useful strategy in fast moving futures markets. This strategy is
intended for the professional full time trader. An average investor would
chewed to bits trying to do this. Professionals, trading stocks for a quarter
point, bonds for a few thirty seconds or currencies for small fractions of a Yen
or Deutsch Marks is not a viable scheme for an average investor.
Sun Tzu said that ground which is reached through narrow gorges and from
which we can only retire by tortuous paths and be ambushed by a small force
is called hemmed in ground. Therefore, resort to stratagem.
This when we find ourselves in one of those difficult situations. If you can, try
not to panic and think instead of a creative solution to your problem.
I like to think that there is always something to do. This is more common to
the average investor than professionals although it happens to them as well.
Sometimes, the best avenue is the one of escape. Better to escape wounded
than to die on the battlefield. Other times, it may be better to make use of
kindred markets such as options, assuming you know what you are doing.
The point is not to panic. Stay calm and think your predicament though.
Decide on a course of action. Once you have done that, execute your plan.
Sun Tzu said that those of old that were known to be skillful leaders knew how
to drive a wedge between the enemies's troops. They went into battle only
when it was to their advantage to do so.
You trade to make money, not for fun and games. Trading is a business and
you should treat it as such. If you see no advantage to entering a market it is
best to stand aside and wait for a better day and another opportunity.
Sun Tzu, when asked how he coped with a large well organized force, ready to
attack, replied that he takes something which they hold dear.
It is well known among professionals that weak hands and small participants
will get out of a position if it moves above or below the previous days high or
low. They will therefore take something which you hold dear. Knowing this,
do not give it to them so easily.
Sun Tzu also said that rapidity is the essence of war; that is, taking advantage
of others that are not ready.
Once you spot an opportunity, do not hesitate to execute your trade. You take
advantage of weak hands.
Sun Tzu said that the further you penetrate into a hostile country, the greater
the solidarity of your troops and thus defenders will not prevail.
Once again, this is the concept of adding to winning positions with momentum
on your side. This is even more true in the commodities futures markets,
where losers have to be liquidated quickly driving the market even more.
Sun Tzu said that when soldiers are in desperate straits, they lose their sense of
fear. If there is no place of refuge, they will stand firm and show a stubborn
front.
After a market moves a great distance, there will come a point when it will
move no more. Make sure that you are aware of that spot and that there is
someone there to take the other side of your trade. Do not over stay in a
market or try to cherry pick the top or bottom.
Sun Tzu said that the skillful tactician is like the Shuai-Jan, a snake found in
the mountains. Strike at its head and you will be attacked by its tail. Strike at
its tail and you will be attacked by its head. Strike at the middle and you will
be attacked by both.
You should be flexible and not a one way trader. Most people will risk their
capital to buy
something in hopes that it will rise in price but will not risk it to sell something
short if the
prospect is that it will decline in price. Certainly, selling short is not a strategy
for the neophyte and one should be well experienced and be aware of the risks
involved in this. I would have to tell you that experienced professional traders
are more than willing to sell short as prices generally decline much more
rapidly than they advance.
You should learn to expect the unexpected. Think ahead about what it would
take for something good or bad to happen and similarly what would happen
given a set of circumstances. Most importantly, have a plan in place to take
advantage of that situation.
Sun Tzu, when asked if an army can be made to imitate this snake, he replied
that it can.
You must not only be flexible, you must learn to anticipate the adversary, plan
your response and execute without hesitation.
Sun Tzu said that the business of the general is to be quiet and thus ensure
secrecy
and maintain order.
Be methodical in your plans. When a given report is due to come out, plan
ahead of time what you will do if it is in line with expectations or if it is a
surprise in either direction and what the likely market response will be.
Sun Tzu also said that the general keeps his men and officers ignorant of his
plans.
I mentioned previously that any trader worth his or her salt is not going to tell
you what he or she is going to do. Every time I hear one of the many market
seers on television, I wonder what their position is. If you have a good idea,
keep it to yourself until you have established your position. Conversely, be
aware that others could just be promoting a trade that they are already in.
The internet and on-line services have hundreds of chat rooms, message
boards, newsgroups and so forth. Outside of being a regulatory nightmare for
the government, be very skeptical of what you read or hear.
Sun Tzu said that the leader of an army should act like one that has climbed up
a height and then throws away the ladder.
Professional traders and those that want to be traders must focus, concentrate,
and not be distracted.
Sun Tzu reminds us that the different measures suited to the nine types of
ground, the
expediency of offensive or defensive tactics and human nature must be
studied.
You must learn not only the tactics involved in trading but market psychology
as well. I have seen numerous computerized trading programs. I have
examined all the historical technical tools. Yet nothing can replace an
appreciation for market psychology and pure gut instinct.
Sun Tzu concludes this lesson by admonishing us to lead an army as if it was a
single soldier. That when in danger, a soldier will strive for victory. That, if
you focus on the enemy, you can kill it from a great distance.
So many traders will look at an opportunity and see the risk or how badly they
can be hurt. You must learn to see the reward of the equation, to keep a single
minded purpose of winning and not be distracted from the task at hand.
Dean Lundell is the Managing Director and CTA of Osiris Trading, Ltd and
author of Sun Tzu's Art of War for Traders and Investors. For more
information on Dean's background visit his web site at www.artofwar.com
*
FINAL THOUGHT
"Would you like me to give you a formula for success? It's quite
simple, really. Double your rate of failure. You're thinking of
failure as the enemy of success. But it isn't at all. You can be
discouraged by failure - or you can learn from it. So go ahead
and make mistakes. Make all you can. Because, remember that's
where you'll find success. "
Thomas J. Watson {American Businessman & Founder of IBM}
And so it is with trading. Every trade should be looked upon as a winner because you can learn
from your mistakes and eventually (if you are not too stuck) be successful. You learn much
more about yourself from your failures that your successes. As Rev. Kubose of the Buddhist
Temple of Chicago has often said, " A road without obstacles doesn't lead anywhere."
Greet your losses as lessons and build your success from them.
That's it until April 10.
Edward Allen Toppel
P.S. You can order your personally autographed copy of Zen in the Markets thru my direct
order page at <http://www.samuraitrader.com/order.html>
*****
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The Samurai Trader's email Digest is a production of Samurai Press, Highland Park, IL. All
opinions expressed in the answers provided are those of Edward Allen
Toppel and are not meant to endorse, condemn or in any way guarantee any
of the investment or trading opinions or decisions discussed. |
