laying plans

8/3/2019 Laying Plans

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Counsel From Advisors

From Griffith's comments on Wu Ch'i's 'Art of War' in the Planning Operations Against OtherStates chapter:

"The Marquis of Wu was once deliberating on state affairs and none of his ministers' opinionswas equal to his. He retired from the court looking pleased. Wu Ch'i advanced and said:'Anciently, King Chuang of Ch'u was deliberating on state affairs. None of his ministers' opinionscould equal his. He retired from the council looking worried. Lord Shen asked: "Why does theSovereign look worried?" The King replied: "This humble one has heard that the world neverlacks sages and that a country never lacks wise men. One able to get a sage for his teacher willbe a King; one able to get a wise man for his friend, a Lord Protector. Now I have no talent, andstill my ministers cannot equal me. Ch'u is in danger." This is what worried King Chuang of Ch'u,but pleases you. I, your servant, am secretly apprehensive.' Whereupon Marquis Wu lookedashamed."

Portfolio Management and Risk Management Corollary:

Always endeavor to associate with, ally with, and seek counsel from more experienced, moreintelligent and better informed people than yourself.

Tactical Adaptation To Changing Circumstances

From Griffith's introductory commentary on Mao Tse-Tung's use of Sun Tzu:

"One of the most difficult problems which confronts any commander who has committed hisforces in accordance with a well-developed plan is to alter this in the light of changingcircumstances. Sun Tzu recognized the inherent difficulties, both intellectual and physical, andrepeatedly emphasized that the nature of war is ceaseless change. For this reason operationsrequire continuous review and readjustment."


Incorporate sufficient flexibility to adapt strategies and tactics to make constructive use ofunforeseen events, both favorable and unfavorable, as an inherent element of all plans,strategies, and tactics.

Constant Factors

"The art of war is governed by five constant factors, all of which need to be taken into account.They are: the Moral Law; Heaven; Earth; the Commander; Method and discipline."


The art of portfolio management and risk management is governed by five constant factors aswell. They are: Ethical conduct; Adaptation to events beyond human control; Knowledge and

suitability of strategies and tactics to market conditions; Competent management; Disciplinedorganization and financial management.

Ethical Conduct

"The Moral Law causes the people to be in complete accord with their ruler..."

From Griffith's translation:

"Here Tao is translated 'moral influence'. It is usually rendered as 'The Way', or 'The Right Way'.


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Here it refers to the morality of government; specifically to that of a sovereign. If the sovereigngoverns justly, benevolently, and righteously, he follows the Right Path or the Right Way, andthus exerts a superior degree of moral influence."


Regardless of philosophical or religious inclination, employ all resources in a moral and ethicalmanner at all times. Be generous in rewarding all who constructively participate in portfoliomanagement and risk management efforts, and be generous in supporting worthy endeavorsregardless of material return.

Perception Of, And Adaptation To, Events Beyond Human Control

"Heaven signifies night and day, cold and heat, times and seasons."


"It is clear that the character t'ien (Heaven) is used in this verse in the sense of 'weather', as it istoday."

"By weather I mean the interaction of natural forces; the effects of winter's cold and summer'sheat and the conduct of military operations in accordance with the seasons."

Portfolio Management and Risk Management Corollaries:

Just as we have no control over the weather, we have no control over where the market goes, yetwe can endeavor to forecast both to create a guide for our portfolio management and riskmanagement activities.

Even though we are unable to control market influencing forces, we still need to make our bestforecast of those forces, and assess our exposure, so as to facilitate our strategic planning andtactical adjustments.

Realistically, our forecasts will, on occasion, be wrong. Therefore, the related strategies andtactics may, for a time, also be unsuitable to the situation.

The key point is not the rightness or wrongness of our forecast. Rather, it is the need for us tomaintain the financial and emotional flexibility to adapt our strategies and tactics to accommodatethe realities of the situation.

In summary, keep our energy focused on having a positive influence on the portfolio managementand risk management results produced by the elements we can control, i.e., probabilisticforecasts, risk assessments, strategies, and tactics, as opposed to allowing our energy to bedissipated by concerns over events beyond our control, e.g., weather, fundamentaldevelopments, price, rate, and volatility movements.

Knowledge And Suitability Of Strategies And Tactics To Market Conditions

"Earth comprises distances, great and small; danger and security; open ground and narrowpasses; the chance of life and death."


"Mei Yao-ch'en:...When employing troops it is essential to know beforehand the conditions of theterrain. Knowing the distances, one can make use of an indirect or a direct plan. If he knows thedegree of ease or difficulty of traversing the ground he can estimate the advantages of using


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infantry or cavalry. If he knows where the ground is constricted and where open he can calculatethe size of force appropriate. If he knows where he will give battle he knows when to concentrateor divide his forces."

Portfolio Management and Risk Management Corollary

Study and know the main fundamental supply/demand and price movement behaviorcharacteristics (profile) exhibited by each market traded. This is essential to ensuring thesuitability of strategy and tactics to the market's phase, section, pattern, swing level and volatility.

Competent Management

"The Commander stands for the virtues of wisdom, sincerity, benevolence, courage, andstrictness."


"Tu Mu:... If wise, a commander is able to recognize changing circumstances and to actexpediently. If sincere, his men will have no doubt of the certainty of rewards and punishments. Ifhumane, he loves mankind, sympathizes with others, and appreciates their industry and toil. If

courageous, he gains victory by seizing opportunity without hesitation. If strict, his troops aredisciplined because they are in awe of him and are afraid of punishment."


Strive to develop a balanced management skill set to enable prudent employment of all portfoliomanagement and risk management resources.

Disciplined Organization And Financial Management

"By Method and discipline are to be understood the marshaling of the army in its propersubdivisions, the gradations of rank among the officers, the maintenance of roads by whichsupplies may reach the army, and the control of military expenditure."


Discipline, efficient and effective organization, communication, and suitable utilization of allresources (people, plans, tools, capital) are all critical to portfolio management and riskmanagement success.

Deception And "Shaping"

"All warfare is based on deception. Hence, when able to attack, we must seem unable; whenusing our forces, we must seem inactive; when we are near, we must make the enemy believewe are far away; when far away, we must make him believe we are near. Hold out baits to enticethe enemy. Feign disorder, and crush him. If he is secure at all points, be prepared for him. If he

is in superior strength, evade him. If your opponent is of choleric temper, seek to irritate him.Pretend to be weak, that he may grow arrogant. If he is taking his ease, give him no rest. If hisforces are united, separate them. Attack him where he is unprepared, appear where you are notexpected".


Although, as individual portfolio managers and risk managers, we have limited ability to deceiveand manipulate the markets, however, we can minimize the opportunity for other marketparticipants to impair our success by keeping our strategies and tactics to ourselves. Allow


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strategies and tactics to become apparent only when results have been secured and if disclosureenables rational and gainful business development efforts, or when regulatory reportingrequirements necessitate.

Active Portfolio Management and Risk Management Corollary:

When possible, and economically advantageous, establish multi-faceted positions through trustedintermediaries to minimize the opportunities for others to determine our strategies and tactics.This will also enable flexibility in adapting to evolving market conditions.

Avoidance Of Being Deceived And "Shaped"

Griffith's commentary on Sun Tzu On War:

"The same factors determine the 'shape' of the opposing armies. The prudent commander baseshis plan on his antagonist's 'shape'. 'Shape him', Sun Tzu says. Continuously concerned withobserving and probing his opponent, the wise general at the same time takes every possiblemeasure designed to prevent the enemy from 'shaping' him."

"The wise general cannot be manipulated."

"His primary target is the mind of the opposing commander; the victorious situation, a product ofhis creative imagination. Sun Tzu realized that an indispensable preliminary to battle was toattack the mind of the enemy."


Given our limited ability to deceive or "shape" the markets, and the markets seeming unlimitedability to deceive or "shape" us (through surprises, rumors, panics, false moves, etc.), beprepared with a management process that immediately enables us to recognize when we havebeen deceived.

Furthermore, when we have been deceived, this process should enable us to maintain the

presence of mind and discipline to minimize the damage from adverse events, and, capitalize onunexpected opportunities.

To avoid being deceived, we need to be continually improving our individual and corporatestrengths and weaknesses. The issues to be addressed in this regard include; our emotions --ego, hope, fear, and, greed; our focused knowledge and experience; our understanding of humannature; our understanding of each market's phase, section, pattern, swing, and volatilitycharacteristics, and idiosyncrasies (e.g. contract and government program specifications); ourunderstanding of suitable strategies, tactics; and, our awareness of opposing participants'positions and strategies.


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On Waging War(Wagin War) Chapter 1 - Return to Table of Contents -Chapter 3

Focus on the object of war and proper engagement.

Stay Focused On Strategic Objectives

"In war, then, let your great object be victory, not lengthy campaigns."


Always keep attention and action focused on achieving strategic objectives as promptly aspossible, (within what the market will allow), as opposed to becoming distracted by the nuancesand intricacies of implementing complex strategies and tactics.

Reward/Risk

"When you engage in actual fighting, if victory is long in coming, the men's weapons will grow dull

and their ardor will be dampened. If you lay siege to a town, you will exhaust your strength, and ifthe campaign is protracted, the resources of the state will not be equal to the strain. Never forget:When your weapons are dulled, your ardor dampened, your strength exhausted, and yourtreasure spent, other chieftains will spring up to take advantage of your extremity. Then no man,however wise, will be able to avert the consequences that must ensue."

"In all history, there is no instance of a country having benefited from prolonged warfare."


When evaluating and implementing portfolio management and risk management strategies besure to balance time factors and resources required with expected rewards and risks.

If the rewards of the strategy are not forthcoming within the expected timeframe, withdraw inorder to regroup and refresh resources in preparation for future engagements.

Ensure Appropriate Financing

"The skillful general does not raise a second levy, neither are his supply wagons loaded morethan twice."


Assuming adherence to the principles in the Laying Plans section, ensure appropriate financing

and resources prior to strategy implementation. Avoid exhausting finances and other resourcesbeyond what was envisioned and risked in the original strategy.

Timing

"Once war is declared, he (the general) will not waste precious time in waiting for reinforcements,nor will he turn his army back for fresh supplies, but crosses the enemy's frontier without delay.The value of time--that is, being a little ahead of your opponent--has counted for more than eithernumerical superiority or the nicest calculations with regard to commissariat."
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"An attack may lack ingenuity, but it must be delivered with supernatural speed."


Timing, in almost every aspect of portfolio management and risk management, is critical,especially given that we will always be in the financial and numerical minority. Therefore, when adecision has been made, do not equivocate, implement it promptly.

Self-Sustaining Strategies

"Bring war material with you from home, but forage on the enemy. One cartload of the enemy'sprovisions is equivalent to twenty of one's own, ..."


Allow for adequate financing from own reserves to initiate portfolio management and riskmanagement strategies.

Make use of every opportunity, within every strategy, to sell time value (a wasting asset) tosecure option premium income from the opposition so as to finance the maintenance of thestrategy.

Reward, Replenish, And Invest In Support Structure

"...when you capture spoils from the enemy, they must be used as rewards, so that all your menmay have a keen desire to fight, each on his own account."


After a successful campaign, be sure to allocate appropriate parts of the rewards to all resources

employed in the portfolio management and risk management activity; replenish, and perhapsgrow, liquidity account; increase longer term diversified investment portfolio; reward associates;replenish spiritual, emotional, mental, and physical reserves; and, invest in up-grading portfoliomanagement and risk management support structure.


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The Sheathed Sword(Offensive Strategy) Chapter 2 - Return to Table of Contents-Chapter 4

Focus is on knowledge of self and opposition, and the accomplishment of objectives by informedpre-positioning so as to minimize the need to engage in costly conflict.

Importance Of Knowledge, Wisdom, And Understanding

"If you know the enemy and know yourself, you need not fear the result of a hundred battles. Ifyou know yourself but not the enemy, for every victory gained you will also suffer a defeat. If youknow neither the enemy nor yourself, you will succumb in every battle."


Have a sound portfolio management and risk management philosophy and money managementdiscipline, and know them thoroughly. Know your own psychological ability to implement everystrategy and tactic within the philosophy and discipline. Have an analytic framework that allowsfor timely evaluation and measurement of market activity, and the development, implementationof, and maintenance of suitable strategies and tactics.

Patience, Positioning, And Timing

"To fight and conquer in all your battles is not supreme excellence; supreme excellence consistsin breaking the enemy's resistance without fighting."

"Thus the highest form of generalship is to balk the enemy's plans; the next best is to prevent thejunction of the enemy's forces; the next in order is to attack the enemy's army in the field; and theworst policy of all is to besiege walled cities,..."

From Griffith's commentary on Sun Tzu On War:

"Never to be undertaken thoughtlessly or recklessly, war was to be preceded by measures

designed to make it easy to win."

"Thus without battle his (the opposition) army was conquered, his cities taken and his stateoverthrown. Only when the enemy could not be overcome by these means was there recourse toarmed force, which was to be applied so that victory was gained:

(a) in the shortest possible time;(b) at the least possible cost in lives and effort;(c) with infliction on the enemy of the fewest possible casualties."


It is difficult to imagine how an individual portfolio manager or risk manager could break the

market's resistance. However, through patience, positioning, and timing an individual trader cancapitalize on breaks and opportunities provided by the markets.

Although supreme excellence is in succeeding without resorting to battle (with a sheathed sword),most of THE ART OF WAR is devoted to preparation for and engagement in battle. Furthermore,it is difficult to achieve portfolio management and risk management objectives in the financialmarkets without taking a position (unless it is to avoid a loss).

Therefore, endeavor to manage without being drawn into protracted high risk/low returnstrategies, thereby minimizing the need to "unsheathe the sword".
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Essentials For Success

"...we may know that there are five essentials for victory:

He will win who knows when to fight and when not to fight.He will win who knows how to handle both superior and inferior forces.He will win whose army is animated by the same spirit throughout all its ranks.He will win who, prepared himself, waits to take the enemy unprepared.He will win who has military capacity and is not interfered with by the sovereign."


Have a well organized plan, stay focused on strategies and tactics suitable to market conditions,maintain patience in waiting for the markets to provide a qualifying high reward/low risk situation,and the discipline to execute again and again.

Always Have An "Edge"

"Though an obstinate fight may be made by a small force, in the end it must be captured by the

larger force."


As an individual portfolio manager or risk manager, we will always be a "small force" numericallyand financially. However, in portfolio management and risk management, focused knowledge andexperience are substantially more important in defining "large force". Therefore, the objective is tocontinually build our focused knowledge and experience force so as to ensure that we will alwaysbe the "large force" in all strategies we choose to implement.

Focused Application Of Knowledge And Experience

From Griffith's Preface:

"Sun Tzu was well aware that combat involves a great deal more than the collision of armed men.'Numbers alone', he said, 'confer no advantage.' He considered the moral, intellectual, andcircumstantial elements of war to be more important than the physical, and cautioned kings andcommanders not to place reliance on sheer military power."


Even if the amount of capital is large, discipline and ethical application of focused knowledge andexperience is more consequential to the eventual success of the portfolio management and riskmanagement process.

Opportunistic Flexibility

"Humanity and justice are the principles on which to govern a state, but not an army; opportunismand flexibility, on the other hand, are military rather than civic virtues."


The way to capitalize on the endless opportunities created by ever-changing market conditions, isto become engaged as a part of a well thought out portfolio management and risk managementplan and be flexible in adapting tactics to market conditions within the context of each pre-determined strategy.


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Tactics (Dispositions)Chapter 3 -Return to Table of Contents-Chapter 5


"The characterhsing means 'shape', 'form', or 'appearance' or in a more restricted sense,'disposition' or 'formation'. The Martial Classics edition apparently followed Ts'ao Ts'as and titledthe chapterChun Hsing 'Shape [or 'Dispositions'] of the Army'. As will appear, the characterconnotes more than mere physical dispositions."

Opportunistic Flexibility In Adapting Strategies And Tactics To Situation

"The good fighters of old first put themselves beyond the possibility of defeat, and then waited foran opportunity of defeating the enemy."

"To secure ourselves against defeat lies in our own hands, but the opportunity of defeating theenemy is provided by the enemy himself."

"Security against defeat implies defensive tactics; ability to defeat the enemy means taking the

offensive."

"Hence the skillful fighter puts himself into a position that makes defeat impossible and does notmiss the moment for defeating the enemy."


Have a well organized plan. Select and test the alternative strategies that are suitable to themarket phase, section, swing level, and volatility. Have the patience to wait for the markets toprovide qualifying high reward/low risk situations for implementing the selected strategy. Have thediscipline to execute again and again.

Be prompt in making tactical adjustments in implementing strategies as market conditions change

(opportunity perceived, reaction time, and, results).

Adhere to sound money management practices to avoid catastrophic loss of capital, andespecially,

Cut losses short and let profits run -- large losses are the most counterproductive outcomepossible.

Intelligent Questioning Of All Situations

"To see victory only when it is within the ken of the common herd is not the acme of excellence."


Herd instinct.

Market discounting.

Contrary opinion.

Sustainable Success
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"Nor is it the acme of excellence if you fight and conquer and the whole empire says, 'Well done!'True excellence is to plan secretly, to move surreptitiously, to foil the enemy's intentions and balkhis schemes, so that at last the day may be won without shedding a drop of blood."

"What the ancients called a clever fighter is one who not only wins, but excels in winning withease. But his victories bring him neither reputation for wisdom nor credit for courage. For in asmuch as they are gained over circumstances that have not come to light, the world at large knowsnothing of them, and he therefore wins no reputation for wisdom; and inasmuch as the hostilestate submits before there has been any bloodshed, he receives no credit for courage."


The objective of portfolio management is to secure hard dollar rewards that, in turn, are to beutilized/leveraged for constructive purposes. The objective is in no way related to supporting thewasteful trappings of satisfying the ego gratification need of the portfolio manager, risk manager,or anyone else.

Avoidance Of Catastrophic Loss

"He (the clever fighter) wins his battles by making no mistakes. Making no mistakes is what

establishes the certainty of victory, for it means conquering an enemy that is already defeated."


Seldom has a human being accomplished anything without making a mistake. Accordingly, I haveinterpreted the use of the phrase "mistakes" to mean catastrophic mistakes leading to defeat, notthe mistakes that come from being human. Mistakes leading to catastrophic loss of capital tend toresult from our failure to capture and isolate our intentions (plans, strategies, and tactics).Therefore, this Corollary becomes sevenfold;

1. Study past market conditions to know how each market tends to behave in given situations andconditions.2. Maintain discipline of strategy implementation guidelines and acceptable tactical adjustments.

3. Avoid repeating and compounding small mistakes to the point that catastrophic loss of capitalresults.4. Deliberately study every strategy and tactic implemented and endeavor to learn from it.5. Accept the inevitability of being wrong. Conserve capital during the bad times by limiting lossesto a predetermined percent of capital.6. Do not necessarily equate losses to mistakes or defeat. Within the context of our philosophy,losses, when controlled as a part of adapting to market conditions, are simply a part of the cost ofdoing business.7. To be a successful portfolio manager or risk manager, be willing and able to take losses withlimited emotional response.

Ethical Conduct

"The consummate leader cultivates the Moral Law and strictly adheres to method and discipline;thus it is in his power to control success."


"Those skilled in war cultivate the Tao and preserve the laws and are therefore able to formulatevictorious policies.

Tu Mu: The Tao is the way of humanity and justice; 'laws' are regulations and institutions. Thosewho excel in war first cultivate their own humanity and justice and maintain their laws and


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institutions. By these means they make their governments invincible."


Again, regardless of philosophical or religious inclination, employ all resources in a moral andethical manner at all times. Be generous in rewarding all who constructively participate in portfoliomanagement and risk management efforts, and be generous in supporting worthy endeavorsregardless of material return.


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Energy (Energy)Chapter 4 - Return to Table of Contents -Chapter 6


"Shih, the title of this chapter, means 'force', 'influence', 'authority', 'energy'. The commentatorstake it to mean 'energy' or 'potential' in some contexts and 'situation' in others."

Organizational Management

"The control of a large force is the same in principle as the control of a few men: it is merely aquestion of dividing up their numbers. Fighting with a large army under your command is notdifferent from fighting with a small one: it is merely a question of instituting signs and signals."


Regardless of the size of the portfolio, have a well organized written strategic plan with veryspecific guidelines for money management, trade selection, risk control, and profit taking.

Suitability Of Strategies And Tactics To Situation

"To ensure that your whole host may withstand the brunt of the enemy's attack and remainunshaken, use maneuvers direct and indirect. In all fighting, the direct method may be used for

joining battle, but indirect methods will be needed in order to secure victory. Indirect tactics,efficiently applied, are as inexhaustible as Heaven and Earth, unending as the flow of rivers andstreams; like the sun and moon, they end but to begin anew; like the four seasons, they passaway but to return once more."

"...these two in combination give rise to an endless series of maneuvers. The direct and indirectlead on to each other in turn. It is like moving in a circle--you never come to an end. Who canexhaust the possibilities of their combination?"

"Hiding order beneath the cloak of disorder is simply a question of subdivision; concealingcourage under a show of timidity presupposes a fund of latent energy; masking strength withweakness is to be effected by tactical dispositions."


"The concept expressed by cheng, 'normal' (or 'direct') and ch'i, 'extraordinary' (or 'indirect') is ofbasic importance. The normal (cheng) force fixes or distracts the enemy; the extraordinary (ch'i)forces act when and where their blows are not anticipated. Should the enemy perceive andrespond to a ch'i maneuver in such a manner as to neutralize it, the maneuver wouldautomatically become cheng."


Use option oriented strategies (indirect) to establish positions that can be converted to outrightlong or short positions in the underlying (direct) as the market reveals itself.

Timely Implementation

"The quality of decision is like the well-timed swoop of a falcon that enables it to strike anddestroy its victim."

"Energy may be likened to the bending of a crossbow; decision, to the releasing of the trigger."


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Quality analysis leads to the decision to act. Once the decision to act has been made, implementpromptly and without fanfare.

Leverage By Coordinating Complimentary Skill Sets

"The clever combatant looks to the effect of combined energy, and does not require too muchfrom individuals. He takes individual talent into account, and uses each man according to hiscapabilities. He does not demand perfection from the untalented."

"When he utilizes combined energy, his fighting men become, as it were, like rolling logs orstones."

"Thus the energy developed by good fighting men is as the momentum of a round stone rolleddown a mountain thousands of feet in height."


Discipline, efficient, and effective organization and utilization of all resources (people, plans, tools,capital) in the capacity, to which they are best suited, is critical to leveraging portfoliomanagement and risk management success.


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Weak Points & Strong(Weakness and Strengths)

Chapter 5-Return to Table of Contents- Chapter 7

More tactical commentary.


"That the impact of your army may be like a grindstone dashed against an egg, use the science ofweak points and strong."

"You may advance and be absolutely irresistible if you make for the enemy's weak points; youmay retire and be safe from pursuit if your movements are more rapid than those of the enemy."

"An army may march great distances without distress if it marches through country where theenemy is not. You can be sure of succeeding in your attacks if you only attack places that areundefended. You can ensure the safety of your defense if you only hold positions that cannot beattacked. That general is skillful in attack whose opponent does not know what to defend; and heis skillful in defense whose opponent does not know what to attack."


Thoroughly know the characteristics of each market being traded. Judiciously apply resources byselecting and implementing those strategies that are suitable to the market's phase, section,pattern, swing level, and volatility.

Likewise, avoid getting the bias of the position cross-wise with the market's price and volatilitybias.

Be quick to minimize losses if strategy proves to be unsuitable to phase, pattern, or volatility.

Timing

"Whoever is first in the field and awaits the coming of the enemy will be fresh for the fight;whoever is second in the field and has to hasten to battle will arrive exhausted."


Attempt to position, prior to a break, with option spreads and/or pre-established orders to enterbased on confirmation.

Avoid "chasing" a market to get in.


"Therefore the clever combatant imposes his will on the enemy, but does not allow the enemy'swill to be imposed on him."


Again, the individual portfolio manager and risk manager has severely limited, if any, ability toimpose his will on the opposing traders.

Mirror Portfolio Management and Risk Management Corollary:
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The key is to actively take preventative measures to thwart the opposing participants' ability toentice and deceive you into implementing inappropriate strategies, and in so doing, imposing theirwill on you.

Maintain An "Edge" Through Focused Knowledge And Experience

"By discovering the enemy's dispositions and remaining invisible ourselves, we can keep ourforces concentrated, while the enemy's must be divided."

"Hence there will be a whole pitted against separate parts of a whole, which means that we shallbe many to the enemy's few. And if we are able thus to attack an inferior force with a superiorone, our opponents will be in dire straits."

"Numerical weakness comes from having to prepare against possible attacks; numerical strengthfrom compelling our adversary to make these preparations against us."

"Though the enemy be stronger in numbers, we may prevent him from fighting. Scheme so as todiscover his plans and the likelihood of their success. Rouse him, and learn the principle of hisactivity or inactivity. Force him to reveal himself, so as to find out his vulnerable spots. Carefully

compare the opposing army with your own, so that you may know where strength issuperabundant and where it is deficient."


Thoroughly analyze market conditions and categorize (profile) its characteristics.

Preserve capital through adherence to prudent money management principles.

Through patience and our "superior force" of focused knowledge and experience, select andimplement strategies and tactics suitable to the opportunities provided by the market phase,section, pattern, swing level, and volatility.


"What the multitude cannot comprehend is how victory may be produced for them out of theenemy's own tactics."

"All men can see the individual tactics necessary to conquer, but almost no one can see thestrategy out of which total victory is evolved."

"Military tactics are like unto water; for water in its natural course runs away from high places andhastens downward. So in war, the way is to avoid what is strong and to strike at what is weak.Water shapes its course according to the nature of the ground over which it flows; the soldierworks out his victory in relation to the foe whom he is facing."

"Therefore, just as water retains no constant shape, so in warfare there are no constantconditions...He who can modify his tactics in relation to his opponent, and thereby succeedinwinning, may be called a heaven-born captain."

From Griffith's commentary on Sun Tzu On War:

"Sun Tzu's theory of adaptability to existing situations is an important aspect of his thought. Justas water adapts itself to the conformation of the ground, so in war one must be flexible; he mustoften adapt his tactics to the enemy situation. This is not in any sense a passive concept, for if theenemy is given enough rope he will frequently hang himself. Under certain conditions one yields a


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city, sacrifices a portion of his force, or gives up ground in order to gain a more valuableobjective. Such yielding therefore masks a deeper purpose, and is but another aspect of theintellectual pliancy which distinguishes the expert in war."


Maintain a strategic focus at all times, regardless of the circumstances.

The way to capitalize on the endless opportunities created by ever-changing market conditions, isto become engaged as a part of a well thought out trading plan and be flexible in adapting toconditions within the context of the plan. In so doing we will become a part of the markets' energyflow and, thereby, continually improve our ability to successfully understand and utilize marketconditions to our advantage.

Maneuvering (Maneuvre)Chapter 6 - Return to Table of Contents -Chapter 8


"Lit. 'struggle' or 'contest' of the armies' as each strives to gain an advantageous position."

Disciplined Organization

"Without harmony in the state, no military expedition can be undertaken; without harmony in thearmy, no battle array can be formed."

"In war, the general receives his commands from the sovereign. Having collected an army andconcentrated his forces, he must blend and harmonize the different elements thereof beforepitching his camp"


Again, disciplined, efficient, and effective organization and utilization of all resources (people,plans, tools, capital) is critical to leveraging portfolio management and risk management success.


"After that comes tactical maneuvering, and there is nothing more difficult. The difficulty consistsin turning the devious into the direct, and misfortune into gain."


Use option oriented strategies (indirect) to establish positions that can be converted to outrightlong or short positions in the underlying (direct) as the market reveals itself.

The way to capitalize on the endless opportunities created by ever-changing market conditions, isto become engaged as a part of a well thought out portfolio management and risk managementplan and be flexible in adapting strategies and tactics to conditions within the context of the plan.

Inherent Advantages And Disadvantages

"Maneuvering with an army is advantageous; with an undisciplined multitude, most dangerous."


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"...This too literal translation completely misses the point. Ts'ao Ts'ao's interpretation is surelymore satisfactory. The verse is a generalization which introduces what follows. A course of actionwhich may appear advantageous usually contains within itself the seeds of disadvantage. Theconverse is also true."


And again, disciplined, efficient, and effective organization and utilization of all resources (people,plans, tools, capital) is critical to leveraging portfolio management and trading success.

Regardless of how promising a market situation appears, always establish protective lossmeasures. Also, regardless of how bleak a position appears, always be prepared to act on anunexpected advantage afforded by the market.

Timing

"If you set a fully equipped army to march in order to snatch an advantage, the chances are that

you will be too late."


Again, avoid "chasing" a market to get in.

Proper Support

"On the other hand, to detach a flying column for the purpose (to snatch an advantage) involvesthe sacrifice of its baggage and stores."

"An army without its baggage train is lost; without provisions it is lost; without bases of supply it is

lost."


Preserve capital through proper support, prudent strategy and tactic selection, and adherence toprudent money management principles.

Relationship Management

"We cannot enter into alliances until we are acquainted with the designs of our neighbors."


Just as we need to know ourselves and the markets we trade in order to succeed, we need toknow all trading partners we align with.

Develop Knowledge Through Study

"We are not fit to lead an army on the march unless we are familiar with the face of the country--its mountains and forests, its pitfalls and precipices, its marshes and swamps."


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"We shall be unable to turn natural advantages to account unless we make use of local guides."


Be thoroughly informed, both technically and fundamentally, of all major information elements thatinfluence the decision making processes of the participants in each market being traded.

Systematically organize the information in a form that facilitates timely decision making andimplementation, as opposed to inhibiting it.

Trading on "inside" information is illegal. However, by adhering to the two foregoing points, wecan create "local guides" out of how we process and organize market related information.

Develop thought of overlaying significant points of fundamental information on swing charts.

Deception And "Shaping"

"In war, practice dissimulation and you will succeed."

"Let your plans be dark and impenetrable as night"

"He will conquer who has learned the artifice of deviation."

Passive Portfolio Management and Risk Management Corollary:

Keep your strategies and tactics to yourself. Allow them to become apparent only when resultshave been secured.

Active Portfolio Management and Risk Management Corollary:

When possible, establish multi-faceted option positions to enable flexibility in adapting to evolvingmarket conditions.

Mirror Portfolio Management and Risk Management Corollary:

Given our limited ability to deceive the markets and the markets seeming unlimited ability todeceive us, be prepared against being deceived by the opposition by being as fully informed oftheir characteristics and positions as is possible.

Strategic Planning

"Ponder and deliberate before you make a move."


Have a written strategic plan with very specific guidelines for money management, trade

selection, risk control, and profit taking.

Timely Implementation

"Move only if there is a real advantage to be gained."

"...when you move, fall like a thunderbolt."



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Once an opportunity has been identified, a strategy has been selected, and tactics have beendecided on, implement promptly and without hesitation.


"Whether to concentrate or to divide your troops must be decided by circumstances."


Again, maintain a strategic focus at all times, regardless of the circumstances.

Again, the way to capitalize on the endless opportunities created by ever-changing marketconditions, is to become engaged as a part of a well thought out portfolio management and riskmanagement plan and be flexible in adapting to conditions within the context of the plan. In sodoing you will become a part of the markets' energy flow and, thereby, continually improve yourability to successfully interact with market forces.

Reward, Replenish, Invest

"When you plunder a countryside, let the spoil be divided among your men; when you capture

new territory, cut it up into allotments for the benefit of the soldiery."


Replenish, and perhaps grow, liquidity account.

Increase longer term diversified investment portfolio.

Reward associates.

Replenish spiritual, emotional, mental, and physical reserves.

Invest in up-grading portfolio management and risk management support structure.

Organizational Management

"On the field of battle, the spoken word does not carry far enough; hence the institution of gongsand drums. Nor can ordinary objects be seen clearly enough; hence the institution of banners andflags. Gongs and drums, banners and flags, are means whereby the ears and eyes of the hostmay be focused on one particular point. The host thus forming a single united body, it isimpossible either for the brave to advance alone, or for the cowardly to retreat alone."


Have a written plan and very specific guidelines for money management, trade selection, andprofit taking.

Ensure that every member of the portfolio management and risk management unit clearlyunderstands what is to be done.

Discipline, efficient and effective organization, communication, and utilization of all resources(people, plans, tools, capital) is critical to leveraging portfolio management and risk managementsuccess.

Planning, Patience, Timing


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"Now a soldier's spirit is keenest in the morning; by noonday it has begun to flag; and in theevening, his mind is bent only on returning to camp. A clever general, therefore, avoids an armywhen its spirit is keen, but attacks it when it is sluggish and inclined to return. This is the art ofstudying moods."

"Disciplined and calm, he awaits the appearance of disorder and hubbub among the enemy. Thisis the art of retaining self-possession."

"To be near the goal while the enemy is still far from it, to wait at ease while the enemy is toilingand struggling, to be well fed while the enemy is famished--this is the art of husbanding one'sstrength."

"To refrain from intercepting an enemy whose banners are in perfect order, to refrain fromattacking an army drawn up in calm and confident array--this is the art of studyingcircumstances."

"It is a military axiom not to advance uphill against the enemy, nor to oppose him when he comesdownhill."


Have a well organized strategy, the patience to wait for the markets to provide a qualifying highreward/low risk trade, and the discipline to execute again and again.

Through planning, patience, and our "superior force" of focused knowledge and experience,select and implement strategies and tactics suitable to the opportunities provided by the marketphase, pattern, and volatility. In so doing, will avoid getting crosswise of the markets' strength.

Preserve capital through adherence to prudent money management principles, so that when amistake is made the financial consequence will be small.


"Do not pursue an enemy who simulates flight; do not attack soldiers whose tempers are keen.Do not swallow a bait offered by the enemy."


Actively take preventative measures to thwart the opposing participants' ability to entice anddeceive you into implementing inappropriate strategies and tactics.

Variation of Tactics(The Nine Variables) Chapter 7-Return to Table of Contents- Chapter 9


Catastrophic Loss Avoidance

"There are roads that must not be followed, towns that must not be besieged."

"There are armies that must not be attacked, positions that must not be contested, commands ofthe sovereign that must not be obeyed."



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There are times when it is best to be neutral, i.e., have no market positions. This is especially truewhen the only trades available are of the high risk/low reward variety.


"The general who thoroughly understands the advantages that accompany variation of tacticsknows how to handle his troops. The general who does not understand these may be wellacquainted with the configuration of the country, yet he will not be able to turn his knowledge topractical account."


Adjust the tactical implementation of each strategy to contemporary market conditions (phase,section, pattern, swing level, and volatility).

In addition to being well educated and informed regarding markets, current conditions, andstrategy, the successful portfolio manager and risk manager also needs the psychologicalcapacity and discipline to adapt his implementation tactics.

Inherent Advantages And Disadvantages

"In the wise leader's plans, considerations of advantage and of disadvantage will be blendedtogether. If our expectation of advantage be tempered in this way, we may succeed inaccomplishing the essential part of our schemes. If, on the other hand, in the midst of difficultieswe are always ready to seize an advantage, we may extricate ourselves from misfortune."


In every advantageous situation, there is an inherent potential disadvantage. Identify the potentialdisadvantage, establish precautions against it, all the while, continue to pursue the advantage.

In every disadvantageous situation, there is an inherent potential for an advantage to develop. Beconstantly alert to capitalizing on potential advantages, as and when they appear, to diminish

and/or eliminate losses.

Rely On Own Preparation

"The art of war teaches us to rely not on the likelihood of the enemy's not coming, but on our ownreadiness to receive him; not on the chance of his not attacking, but rather on the fact that wehave made our position unassailable."


Never construct and implement a strategy based on hope or fear of what the market may do.Always endeavor to base actions on knowledge, principles, planned strategies, and acceptabletactical adjustments.


"There are five dangerous faults that may affect a general, of which the first two are:recklessness, which leads to destruction; and cowardice, which leads to capture.

Next there is delicacy of honor, which is sensitive to shame; and a hasty temper, which can beprovoked by insults.

The last of such faults is oversolicitude for his men, which exposes him to worry and trouble, for


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in the long run the troops will suffer more from the defeat, or at best, the prolongation of the war,which will be the consequence."


Avoid recklessness by engaging the markets only within the context of a well thought out portfoliomanagement and risk management plan.

Once a strategy has been developed, tested and selected, be bold in implementation.

While always adhering to the Moral Law, also, always be flexible and opportunistic in capitalizingon opportunities provided by changing market conditions.

In stressful situations, minimize the inclination to make emotional decisions.

Also, regardless of the planning that has gone into developing and testing a strategy, there willoften times be some adversity, usually financial losses, encountered in implementation. Beprepared to view the adversity as simply another part of doing business, by adapting strategy andtactics to market conditions, thereby keeping the financial losses small.

The Army on the March (Marches)Chapter 8- Return to Table of Contents - Chapter 10


Respectful Preparation

"He who exercises no forethought but makes light of his opponents is sure to be captured bythem."


Have a written strategic plan with very specific guidelines for money management, trade

selection, risk control, and profit taking.

Be confident based on preparation, but not cocky based on unfounded and/or untestedperceptions.


"Do not climb heights in order to fight."

"If you are anxious to fight, do not go to meet the invader near a river he has to cross. Instead,moor your craft higher up than the enemy, and facing the sun. Do not move upstream to meet theenemy. Our fleet must not be anchored below that of the enemy, for then they would be able totake advantage of the current and make short work of you."

"After crossing a river, get far away from it. When an invading force crosses a river in its onwardmarch, do not advance to meet it in midstream. It will be best to let half the army get across, andthen deliver your attack."


Avoid struggling to get into a trade. Take only those high reward/low risk trades provided by themarket. To do otherwise, will simply exhaust capital and other resources in fruitless trades, andleave you with insufficient wherewithal to capitalize on meaningful trade opportunities when they
http://www.strategies-tactics.com/suntzuchp8.htmhttp://www.strategies-tactics.com/suntzuchp8.htmhttp://www.strategies-tactics.com/suntzu.htm#Contents_Anchorhttp://www.strategies-tactics.com/suntzuchp10.htmhttp://www.strategies-tactics.com/suntzuchp8.htmhttp://www.strategies-tactics.com/suntzu.htm#Contents_Anchorhttp://www.strategies-tactics.com/suntzuchp10.htm


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do appear.

Preserve And Protect Resources

"All armies prefer high ground to low, and sunny places to dark. Low ground is not only damp andunhealthy, but also disadvantageous for fighting. If you are careful of your men, and camp onhard ground, your army will be free from disease of every kind, and this will spell victory."

"When, in consequence of heavy rains up-country, a river which you wish to ford is swollen andflecked with foam, wait until it subsides. Country in which there are precipitous cliffs with torrentsrunning between, deep natural hollows, confined places, tangled thickets, quagmires, andcrevasses, should not be approached or else left with all possible speed."

"If in the neighborhood of your camp there should be any hilly country, ponds surrounded byaquatic grass, hollow basins filled with reeds, or woods with thick undergrowth, they must becarefully routed out and searched; for these are places where men in ambush or insidious spiesare likely to be lurking."


At all times, and especially when strategies are in play, seek to keep all resources in profitableand advantageous positions. Likewise, quickly liquidate unprofitable positions and minimizeexposure to situations with inordinate risk to uncertain market movements.

Study, Observe, Remember, Compare, And Apply

"Movement among the trees of a forest shows that the enemy is advancing."

"The sudden rising of birds in their flight is the sign of an ambush at the spot below."

"When there is dust rising in a high column, it is the sign of chariots advancing; when the dust islow, and spread over a wide area, it betokens the approach of infantry. When it branches out indifferent directions, it show that parties have been sent to collect firewood. A few clouds of dust

moving to and fro signify that the army is encamping."

"Humble words and increased preparations are signs that the enemy is about to advance. Violentlanguage and driving forward as if to the attack are signs that he will retreat."


Know the implications and importance of various market actions and rhetoric, and be prepared toreact accordingly. "Profile" characteristics of each market traded. Constantly compare currentconditions with market "profile".


"If the enemy sees an advantage to be gained and makes no effort to secure it, the soldiers areexhausted."


If a market fails to continue to advance with bullish news, or fails to continue to decline withbearish news, be prepared to adapt strategy tactics accordingly.



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"...soldiers must be treated in the first instance with humanity, but kept under control by means ofiron discipline."

"If, in training soldiers, commands are habitually enforced, the army will be well disciplined; if not,its discipline will be bad."

"If a general shows confidence in his men but always insists on his orders being obeyed, the gainwill be mutual."


Disciplined organization and utilization of all resources is critical to successful portfoliomanagement and risk management.

Terrain (Terrain)Chapter 9-Return to Table of Contents- Chapter 11


"Topography or conformation of the ground."

Market Analysis

"We may be able to distinguish six kinds of terrain: accessible ground, entangling ground,temporizing ground, narrow passes, precipitous heights, positions at a great distance from theenemy."


One way of viewing our perception of the "terrain" or "ground" of the markets is to liken us to anexperienced river traveler exploring and mapping uncharted wilderness inhabited by hostilepeople. And to liken market price movements to the river we are utilizing as our main conveyance

through that wilderness.

We can look back through our charts, records, and other "profiling" data and see where we havetraveled, and observe the obstructions that have caused the river to change its course and speedand, likewise, have caused us to leave the river and portage around unsafe stretches. We wouldalso be able to review our skirmishes with the hostiles, both on the river and during the portages.

It is through these experiences that we gain a sense of the character and "profile" of the river(each market's price movement) and its response pattern(s) to the country (conditions and eventsthat influence price movement) through which it is moving. These experiences also enhance ourunderstanding of our vulnerability to the river and the hostile intent of the inhabitants, as well asour ability to make constructive use of the river in pursuing our objectives.However, given the inevitable twists and turns all rivers take and the inclement weather

conditions (fog, etc.) we are obliged to travel through, we cannot always see where the river isgoing to carry us, or the movement of the hostile forces.

Therefore, our perception of the impending terrain and hostile action, and the concomitant impacton the shaping of our strategies and tactics will, to some degree, be influenced by what ourexperience and ability to understand the current behavior of the river tells us.

The character of the movement of the river, in and of itself, will provide some insight into theterrain through which we are traveling, whether we can see the terrain or not. Sometimes, that willbe all we have to rely on in preparing our travel plans and defenses against hostile attack.


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"Ground that can be freely traversed by both sides is called accessible. With ground of thisnature, beat the enemy in occupying the raised and sunny spots, and carefully guard your line ofsupplies. Then you will be able to fight with advantage."

"Ground that can be abandoned but is hard to reoccupy is called entangling. From a position ofthis sort, if the enemy is unprepared, you may sally forth and defeat him. But if the enemy isprepared for your coming, and you fail to defeat him, then, return being impossible, disaster willensue."

"When the position is such that neither side will gain by making the first move, it is calledtemporizing ground, and the situation remains at a deadlock. In a position of this sort, eventhough the enemy should offer an attractive bait, it will be advisable not to stir forth, but rather toretreat, thus enticing the enemy in his turn; then, when part of his army has come out, you maydeliver your attack with advantage."

"With regard to narrow passes, if you can occupy them first, let them be strongly garrisoned andawait the advent of the enemy. Should the enemy forestall you in occupying a pass, do not go

after him if the pass is fully garrisoned, but only if it is weakly garrisoned."

"With regard to precipitous heights, if you precede your adversary, occupy the raised and sunnyspots, and there wait for him to come up. Remember, if the enemy has occupied precipitousheights before you, do not follow him, but retreat and try to entice him away."

"With regard to positions at a great distance from the enemy, if the strength of the two armies isequal, it is not easy to provoke a battle, and fighting will be to your disadvantage."


Manage resources to be consistent with the phase, pattern, and volatility of the market.

Pre-position with options.

Control catastrophic loss risk through money management.

Avoid struggling to get into a trade.

Trade only when there is a leveragable advantage, i.e., for every dollar of risk, make sure there isthe realistic potential for a predetermined multiple reward.


"Sometimes an army is exposed to calamities, not arising from natural causes, but from faults forwhich the general is responsible. These are: flight; insubordination; collapse; ruin;

disorganization; rout."


Establish, maintain, and continually strengthen the philosophical fiber that holds the elements andsubstance of our portfolio management and risk management approach together regardless ofthe nature of our immediate circumstances, whether they be prosperous or poor, favorable orunfavorable, difficult or easy.

Develop And Maintain An "Edge"


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"Other conditions being equal, if one force is hurled against another ten times its size, the resultwill be the flight of the former."


Always endeavor to be the superior force, at minimum, through focused knowledge andexperience.

Balanced Diversification

"When the common soldiers are too strong and their officers too weak, the result isinsubordination."

"When the officers are too strong and the common soldiers too weak, the result is collapse."


Maintain balance in resource management and diversification in risk positions.


"When the higher officers are angry and insubordinate, and on meeting the enemy give battle ontheir own account from a feeling of resentment, before the commander in chief can tell whether ornot he is in a position to fight, the result is ruin."


Be disciplined in the use of all portfolio management and risk management resources at all times.

Remain unemotional in all situations.

Clear Communication

"When the general is weak and without authority; when his orders are not clear and distinct; whenthere are no fixed duties assigned to officers and men, and the ranks are formed in a slovenly,haphazard manner, the result is utter disorganization."


Ensure clear communication in all aspects of the development, testing, and implementation ofstrategy and tactics.



"When a general, unable to estimate the enemy's strength, allows an inferior force to engage alarger one, or hurls a weak detachment against a powerful one, and neglects to place pickedsoldiers in the front rank, the result must be a rout."


Always endeavor to be the superior force, at minimum, through focused knowledge and


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experience. Otherwise remain neutral.

Manage resources to be consistent with the phase, pattern, and volatility of the market.


"These are the six ways of courting defeat -- neglect to estimate the enemy's strength; want ofauthority; defective training; unjustifiable anger; nonobservance of discipline; failure to use pickedmen -- all of which must be carefully noted by the general who has attained a responsible post."

"The natural formation of the country is the soldier's best ally; but a power of estimating theadversary, of controlling the forces of victory, and of shrewdly calculating difficulties, dangers, anddistances, constitutes the test of a great general. He who knows these things, and in fighting putshis knowledge into practice, will win his battles. He who knows them not, nor practices them, willsurely be defeated."


"Profile" all you can learn about each market being traded.


Continuously improve focused knowledge and experience.

Remain unemotional in all situations.


Suit strategies and tactics to phase, section, pattern, swing level, and volatility of market.

Stay Focused On Achieving Strategic Objectives

"The general who advances without coveting fame and retreats without fearing disgrace, whoseonly thought is to protect his country and do good service for his sovereign, is the jewel of thekingdom."


Keep attention and actions focused on achieving strategic objectives within reasonable timeframes, and with minimal loss or expenditure of resources.

Focused Knowledge And Experience

"If we know that our own men are in a condition to attack, but are unaware that the enemy is not

open to attack, we have gone only halfway toward victory. If we know that the enemy is open toattack, but are unaware that our own men are not in a condition to attack, we have gone onlyhalfway toward victory. If we know that the enemy is open to attack, and also know that our menare in a condition to attack, but are unaware that the nature of the ground makes fightingimpracticable, we have still gone only halfway toward victory. The experienced soldier, once inmotion, is never bewildered; once he has broken camp, he is never at a loss. Hence the saying: Ifyou know the enemy and know yourself, your victory will not stand in doubt; if you know Heavenand know Earth, you may make your victory complete."



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Have a sound portfolio management and risk management philosophy and money managementdiscipline, and know them thoroughly. Know your own psychological ability to implement thephilosophy and money management guidelines.

Have an analytic framework that allows for timely evaluation and measurement of market activity(represents collective action of other traders).


The Nine Situations(The Nine Varietis of Ground) Chapter 10-Return to Table of Contents- Chapter 12

"The art of War recognizes nine varieties of ground: dispersive ground; facile ground; contentiousground; open ground; ground of intersecting highways; serious ground; difficult ground; hemmed-in ground; desperate ground."

Maintain Disciplined Market Analysis, Even When Neutral

"When a chieftain is fighting in his own territory, it is dispersive ground, so called because thesoldiers, being near to their homes and anxious to see their wives and children, are likely to seizethe opportunity afforded by a battle and scatter in every direction."

"On dispersive ground, therefore, fight not."

"On dispersive ground, inspire your men with unity of purpose."


Maintain disciplined evaluation of on-going market conditions, in each instrument traded, evenwhen position is neutral.

Stop Losses Quickly

"When he has penetrated into hostile territory, but to no great distance, it is facile ground."

"On facile ground, halt not."

"On facile ground, see that there is close connection between all parts of the army."


Profitable trades tend to be profitable from the onset. Loss trades tend to be losers from theonset. Therefore, maintain diligent position management discipline, even in the early stages of a

trade.

Always Tighten Stops, Never Loosen

"Ground that is of great advantage to either side is contentious ground."

"On contentious ground, attack not."

"On contentious ground, hurry up your rear guard."


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After extended moves, avoid adding to positions and tighten up risk management provisions.

Always Maintain Protective Provisions

"Ground on which each side has liberty of movement is open ground."

"On open ground, do not try to block the enemy's way."

"On open ground, keep a vigilant eye on your defenses, fearing a surprise attack."


Maintain protective risk management provisions on all open positions.

Opportunistic Adaptation Of Strategies And Tactics To Situation

"Ground that forms the key to three contiguous states, so that he who occupies it first has most ofthe empire at his command, is ground of intersecting highways."

"On ground of intersecting highways, join hands with your allies."

"On ground of intersecting highways, consolidate your alliances."

"We cannot enter into alliance with neighboring princes until we are acquainted with their designs.


Pre-position with option strategies that allow multiple courses of action as the market revealsitself.

Perform proper due diligence and ensure compatibility before inviting anyone to become a part ofthe portfolio management and risk management group.


"When an army has penetrated into the heart of a hostile country, leaving a number of fortifiedcities in its rear, it is serious ground."

"On serious ground, gather in plunder."

"On serious ground, ensure a continuous stream of supplies."

"The farther you penetrate into a country, the greater will be the solidarity of your troops, and thus

the defenders will not prevail against you. Make forays in fertile country in order to supply yourarmy with food."


Always be alert to selling time value (a wasting asset).

When in the midst of a successful portfolio management and risk management campaign, bediligent in realizing gains, as the market provides the opportunity, and utilizing those gains tomaintain portfolio management and risk management resources.


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Focused Knowledge And Experience

"Mountain forests, rugged steeps, marshes and fens--all country that is hard to traverse: this isdifficult ground."

"In difficult ground, keep steadily on the march."

"On difficult ground, keep pushing on along the road."

"Carefully study the well-being of your men, and do not overtax them. Concentrate your energyand hoard your strength. Keep your army continually on the move, and devise unfathomableplans."

"We are not fit to lead an army on the march unless we are familiar with the face of the country--its mountains and forests, its pitfalls and precipices, its marshes and swamps. We shall be unableto turn natural advantages to account unless we make use of local guides."


Be scrupulous in avoiding trying to force a trade in this type of environment. Instead, concentrateon conserving resources for application to the high reward/low risk situations that will eventuallydevelop.

Catastrophic Loss Protection

"Ground that is reached through gorges, and from which we can only retire by tortuous paths, sothat a small number of the enemy would suffice to crush a large body of our men: this is hemmed-in ground."

"On hemmed-in ground, resort to stratagem."

"On hemmed-in ground, block any way of retreat to make it seem that you mean to defend the

position, whereas your real intention is to burst suddenly through the enemy's lines."


Avoid being forced to trade in this type of situation, unless have pre-positioned through optionstrategies. If it looks like we are crosswise of the market's bias, liquidate. Otherwise, will soon bein desperate ground, where catastrophic loss of capital usually results.

Disciplined Risk Management

"Ground on which we can only be saved from destruction by fighting without delay: this isdesperate ground."

"On desperate ground, fight."

"On desperate ground, proclaim to your soldiers the hopelessness of saving their lives. The onlychance of life lies in giving up all hope of it.

For it is the soldier's disposition to offer an obstinate resistance when surrounded, to fight hardwhen he cannot help himself, and to obey promptly when he has fallen into danger."



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The limitation of applying this War principle to our portfolio management and risk managementeffort is that in war an individual soldier, through desperate action, may have an impact on theenemies movement. But, in portfolio management and risk management our actions asindividuals, desperate or not, have limited to no impact on the outcome of price movement.However, like in war, our actions do have a very direct impact on the outcome of any givenstrategy we choose to implement. Therefore, in trading, our objective is not to seek to enterdesperate ground prepared to "trade till capital is exhausted", rather, it is to impact the outcomeof the strategy by having a well organized strategy, the patience to wait for the markets to providea qualifying high reward/low risk situation, and the discipline to execute again and again.

Paradoxically, we can only make money by exposing ourselves to risk. However, when we findourselves in desperate situations, we will also find that we have failed to manage our risk throughprotective measures. Therefore, we must, at all costs, be disciplined in managing the risk of everystrategy we implement.

Focus On Achieving Strategic Objectives

"The skillful tactician may be likened to the shuai-jan. Now the shuai-jan is a snake that is foundin the Ch'ang 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 its middle, and you will be attacked by head and tail

both."

"Asked if an army can be made to imitate the shuai-jan, answer yes."

"You will not succeed unless your men have tenacity and unity of purpose, and above all, a spiritof sympathetic cooperation. This is the lesson which can be learned from the shuai-jan."

"The principle on which to manage an army is to set up one standard of courage that all mustreach."

"The skillful general conducts his army just as though he were leading a single man by the hand."

"Bestow rewards without regard to rule, issue orders without regard to previous arrangements,and you will be able to handle a whole army as though you had to do with but a single man."



Regardless of the size of the portfolio, have a written strategic plan with very specific guidelinesfor money management, trade selection, risk control, and profit taking.

Discipline, efficient, and effective organization, along with opportunistic and flexible utilization ofall resources (people, plans, tools, capital) is critical to leveraging portfolio management and risk

management success.

Study, Observe, Remember, Compare, And Apply

"How to make the best of both strong and weak is a question involving the proper use of ground."


Physiologically, most humans are very similar, yet each human is distinctly different and unique(DNA, fingerprints, scent, psyche, etc.). Therefore, each person needs to be dealt with differently,


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yet, consistently within a sound framework of principled guidelines. Markets can be viewed in asimilar manner. All markets experience price movement, yet each one moves in its own uniqueway. Therefore, need to learn to recognize and trade utilizing the unique phase, section, pattern,swing, and volatility "profiles" of each market and instrument traded.

Management Competence

"It is the business of a general to be quiet and thus ensure secrecy; upright and just, and thusmaintain order."


Establish, maintain, and continually strengthen the philosophical fiber that holds the elements andsubstance of our trading approach together regardless of the nature of our immediatecircumstances, whether they be prosperous or poor, favorable or unfavorable, difficult or easy.

Staying focused on discipline, efficient, and effective organization, and opportunistic and flexibleutilization of all resources (people, plans, tools, capital) is critical to maintaining a successfulportfolio management and risk management program.


"To master his host and bring it into danger -- this may be termed the business of the general.The different measures suited to the nine varieties of ground; the expediency of aggressive ordefensive tactics; and the fundamental laws of human nature: these are things that must mostcertainly be studied."

"For it is precisely when a force has fallen into harm's way that it is capable of striking a blow forvictory."

"Success in warfare is gained by carefully accommodating ourselves to the enemy's purpose."

"By persistently hanging on the enemy's flank, we shall succeed in the long run in killing the

commander in chief--a vital act in war."

"Walk in the path defined by rule, and accommodate yourself to the enemy until you can fight adecisive battle."

"At first, then, exhibit the coyness of a maiden, until the enemy gives you an opening; afterwardemulate the rapidity of a running hare, and it will be too late for the enemy to oppose you."


The only way to make money trading markets is to incur risk. The challenge is to manage the risk.

The way to capitalize on the endless opportunities created by ever-changing market conditions, isto become engaged as a part of a well thought out portfolio management and risk managementplan and be flexible in adapting to market conditions within the context of the plan.

Avoid struggling to get into a trade. Take only those high reward/low risk trades the marketprovides

Suit strategies and tactics to phase, section, pattern, swing level, and volatility of market.


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Attack by Fire(Attack by Fire) Chapter 11-Return to Table of Contents- Chapter 13

Manias, panics, and unreasoned greed and fear.

Disciplined Emotions

"There are five ways of attacking with fire. The first is to burn soldiers in their camp; the second isto burn stores; the third is to burn baggage trains; the fourth is to burn arsenals and magazines;the fifth is to hurl dropping fire among the enemy."


Regardless of how a fire starts, the usual result is panic. Markets periodically experience maniasand panics that are accompanied by extreme price movements. Our challenge is to remain calmand prepared to capitalize on the opportunities created by the extreme price movements as

opposed to being trampled by the movement.


"In order to carry out an attack with fire, we must have means available; the material for raisingfire should be kept in readiness."


As individual portfolio managers and risk managers, we are not in a position to precipitate amania or panic. However, we can be in position to observe and profit from the unreasoned, herd-like price movements that often times accompany mania and panic market conditions.


"There is a proper season for making attacks with fire, and special days for starting aconflagration."

"In attacking with fire, one should be prepared to meet five possible developments. When firebreaks out inside the enemy's camp, respond at once with an attack from without. If there is anoutbreak of fire, but the enemy's soldiers remain quiet, bide your time and do not attack. Whenthe force of the flames has reached its height, follow it up with an attack, if it is practicable; if not,stay where you are. If it is possible to make an assault with fire from without, do not wait for it tobreak out within, but deliver your attack at a favorable moment."

"In every army, the five developments connected with fire must be known, the movements of the

stars calculated, and a watch kept for the proper days."

"The enlightened ruler lays his plans well ahead..."


Study past manias and panics. Become familiar with the conditions accompanying them. Be alertfor similar conditions to appear and be prepared to capitalize on them.



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"When you start a fire, be to the windward side of it. Do not attack from the leeward. If the wind isin the east, begin burning to the east of the enemy, and fo

laying plans

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