ACTION principles for trading success

August 21, 2010 09:24 pm | Updated 09:24 pm IST - Chennai

Title: Aiki Trading, Trading in Harmony with the Markets. Author: Jeffery Tie.

Title: Aiki Trading, Trading in Harmony with the Markets. Author: Jeffery Tie.

When learning Japanese martial arts, the beginner student is usually introduced to one basic technique for internalising so that he can respond to a specific combat situation, notes the intro to ‘Aiki Trading’ by Jeffery Tie (www.wiley.com). “If this combat situation is altered, then the initial technique may not provide the student with a satisfactory solution. He needs to learn new techniques and then internalise them with his existing knowledge in order to widen the combat situations that he understands and can properly respond to.”

So it is with trading, the author adds. Financial markets and their behaviour being complex, it will be extremely difficult, if not impossible, for any beginner to gain immediate mastery of the same, he reasons. “The logical solution is to break down the complexities into bite-size basic building blocks. As the student progresses, additional knowledge is acquired and existing knowledge built upon, allowing the student to begin understanding ever more complex situations.”

Learning from martial art

For starters, ‘aiki’ means harmony in Japanese. Aikido, the martial art, best exemplifies the concept of aiki, the author finds. With the benefit of years of practice in both Japanese martial arts and in financial markets, and drawing inspiration from Richard McCall’s book ‘The Way of the Warrior Trader,’ Tie encapsulates, in an acronym ACTION, the principles by which the successful martial artist and the successful trader should live by.

The first of the six principles is ‘acceptance’ of discomfort and pain in the dojo (training hall), and loss and profit in trading, as part of the learning experience. “Both the martial artist and the trader have accepted that the path to mastery will require commitment of time, effort, energy, and resources. Chinese wushu practitioners will recognise the same concepts in their term, ‘eating bitter.’”

C, the second letter, is for ‘calmness and clarity.’ For, the calm warrior will be able to meet the challenges of strife and combat with a clear mind, a mind that allows him to move with trained reflex responses in the face of danger, explains Tie. Similarly, the trader whose mind is calm and clear will be better prepared to correctly respond to the emotional dangers that the financial markets are well known for, he instructs. “Greed, hope, fear, and despair have devastated many traders in the past and will continue to devastate many aspiring traders in the future.”

Trust, imagine

The next principle is ‘trust in training’ – that it will produce the correct winning response in combat. So, too, the aspiring trader who perseveres in his practice of a good trading method will eventually gain confidence, and will trust in his abilities through disciplined training, the author assures.

I, the fourth letter in the acronym, is for ‘imagination.’ Every successful person in any endeavour must have belief in the eventual success, and belief starts as imagination, the author elucidates. “The successful martial artist or trader must combine both dedicated disciplined effort with specific visualisation through the imagination of what success will be like for him. Cogito, ergo sum (Latin for ‘I think, therefore I am’) will be the mental spur for any successful person.”

Live in the now

O for ‘only,’ continues the author. Only live in the now, he urges, because living in the bitterness of prior losses or living upon past glories will never lead to the mindset changes that success will require of us; we need to learn from the past, and correctly imagine the future, but not at the expense of the present.

The book describes grim realities such as of traders living in the past and continuing to pray that their desired result can still occur even when the market goes against the original hoped for result. “Then, there are also occasions when the trader tries to anticipate what the market can do, effectively ‘living in the future’ instead of waiting for his method to activate and trigger the trade, which is the ‘living in the now’ entry. Then they find that they have entered a trade in anticipation, but soon discover that the proper signal did not actually occur yet!”

And, the corollary can be N, the final letter in the acronym, for ‘never.’ That is, never look back once action has started; or, in trade, never look back with or at the regrets of the past, as Tie counsels.

The aiki trader

As an aiki trader, you will have to understand the market behaviour and act in harmony with the market, the book advocates. In a continuing uptrend, for instance, the author’s preferred form of aiki trading will buy the corrective dip. “The aiki trader enters and attacks the weak seller at the correction’s end, and is entering in harmony with the major uptrend. Similarly, in a continuing downtrend, the aiki trader will sell the corrective rally.”

In a continuing sideways or range-bound market, Tie’s portrayal of the aiki trader is as one who will buy the floor and sell the ceiling precisely because of the recognition that the selling force weakens at the support, and buying forces weaken at the resistance, thus allowing the trader an attacking entry directly into the weakening force.

There is no ‘silver bullet’ or ‘secret manual’ that confers immediate success; yet, success can come from knowing what to do, doing what you know, and doing it flawlessly, says the author.

Three pillars in trading formula

The book has detailed chapters on topics such as candlestick charting, expanded sideways range pattern, directional trending pattern, successful breakout, oscillators, and application of Fibonacci numbers and ratios in trade analysis.

Importantly, the final chapter is on trading psychology, where Tie lays down a simple formula: ‘Trading success = (Market understanding) x (money management) x (winning psychology).’ He draws attention to the multiplication sign, because if any one of the ‘three pillars’ on the right-hand side is zero, then trading success will be zero, too!

Market understanding carries a weight of 10 per cent of the overall success, and it allows the trader to locate high-probability low-risk action zones which, in turn, increase the probabilities of success. “In an uptrend, we are looking to buy undervalued prices. In a downtrend, we are looking to sell overvalued prices. Market understanding allows us to put the probabilities of winning on our side.”

The second pillar of success is about the management of risk, money and trade, with a weight of 30 per cent in overall result. Most casualties of disastrous trading losses, rues Tie, are a result of overestimating the profits without properly considering the risks.

While, in essence, money management and trade management can be expressed as some form of mathematical formulae, he reminds that these formulae and rules must work in conjunction with a robust trade plan that demonstrates a winning edge over time. “Implementing good risk and money management with a losing trade plan will result in a slowly depleting capital. This is akin to a combatant slowly bleeding away, and this is definitely not the way toward success.”

Winning psychology

The most important pillar in the equation is the third, ‘winning psychology,’ with a 60 per cent weight. But why is this so critical? Because if the outer enemy is the market, the inner enemy is ourselves, and it is essential to understand our emotional responses in trading, the author observes. “At its most basic and fundamental essence, the human psyche moves toward pleasure and away from pain. The human brain, particularly the prefrontal cortex requires tremendous amounts of energy to overcome inertia, and in the absence of compelling motivation, will not prefer to work!”

Emphasising the indispensability of knowledge, the author likens the market behaviour to a dark universe where novice traders are stumbling and groping in fear and confusion. The knowledge you acquire will shine a beam of light into this dark universe, he says. “We will trade only if we can understand what we see in this cone of light. Market situations that are still in the darkness will be situations that we will elect not to engage in because we are not able to understand it. What we need to do is to gain new knowledge, so that we can increase the size of this beam of light that we now shine into the dark…”

Suggested study for serious traders.

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