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The 36 Strategies of the Chinese

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Financial Traders 

 

36 Strategies

 

Daryl Guppy ©2006, Hardback, 515 pps

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"Well I finished the 500 odd pages and must reiterate that this is probably the best book I have read on a general technical analysis... To me this is the most useful book that I have read since understanding the share market." - Reader

 "Guppy convincingly shows that ancient Chinese Strategies are not only relevant to modern business, but also full of practical wisdom to help traders and investors succeed in modern financial markets.   A groundbreaking work and a  delightful read!"  Stephen Lai, CEO,  NextVIEW Group, Singapore, (www.thenextview.com)

SUMMARY EXTRACT

    Somewhere between Shanghai and Beijing I realised I had successfully implemented the classic Chinese strategy of Creating Something out of Nothing, closing a parabolic trend trade at a substantial profit. It was a new way of thinking about the way I approached the market and provided a wider strategic context for understanding market activity. Thoughts and impressions which had been developing for many years came together on this flight. My recent work with Chinese financial traders in Shanghai and Nanjing provided the immediate catalyst to combine these traditional concepts with financial market trading. Previously in Beijing and Shenzhen, questions from experienced and aspiring traders in the audience revealed a different way of thinking about the structure of markets and market activity. This book is a more detailed exploration of how these ancient strategies are integrated with modern financial trading.

    Perceptive viewers of the Chinese film Hero have appreciated the action and application of many of these strategies by the characters in the drama. The 36 strategies lie at the very heart of the artistic appeal of the plot and character relationships. They are essential to the dramatic tension.

     These strategies apply when you are under attack, or when you wish to defend yourself by taking offensive action. In the market we are always under attack and we always try to take the offensive to wrest profits from a market that is skilled in withholding them. The 36 Strategies of the Chinese is an ancient and classic text and has no single author. It is a compilation of political and military strategies dating back more than 1800 years. It is drawn from classic Chinese poetry, history, philosophy, biographies, and novels such as The Romance of the Three Kingdoms. It appears to have been first collated around 400 years ago. Traditionally it has 36 chapters divided into groups of six. These 36 strategies are often said to underpin Chinese business behavior. They certainly provide a framework background against which business is conducted but they are also a foundation of other relationships.

     These strategies bear little relationship to the material in The Art of War by Sun Tzu, which contains 13 chapters detailing military tactics and is appropriate for military or war-like situations. It lacks the broader philosophical and political basis underpinning The 36 Strategies of the Chinese. The activity of two Tang Dynasty poets which forms the basis of Strategy 17, Tossing Out a Brick to get Jade, finds no equivalent in the military scenarios in The Art of War.

     This is a book about trading techniques. It includes specific methods for trading the market, including reading the order line information, understanding the behavior of market makers and integrating news events into price activity. This is not a book about charting or technical analysis, although many of the strategies are based on these trading approaches. We assume you are familiar with the basics of technical analysis and the major indicators so we do not explain these in great detail.

     This is not a book about investing, although many of the strategy examples may be used to improve exit and entry points. A number of the strategies of confusion, deception and desperation are also relevant to investors because the market applies these strategies to their disadvantage. Protection against the application of these strategies is important if investors and traders are to implement effective countermeasures.

     The original 36 strategies fall into two groups of three categories each. Each category contains six strategies. The first 18 strategies are applied when you have the advantage. The second 18 strategies are applied when you are at a disadvantage. This is the classic structure and we retain it in this book.

     The strategies are discussed separately, but in reality these strategies are combined to provide the most effective outcomes in any situation. The importance is not the detail of the strategies, but the wider thinking to encourage you to understand the strategic context of action in the financial markets.

Strategies of advantage

    Strategies 1 through 6 are advantageous strategies. They are applied when you have the luxury of time and resources. Detailed planning is possible so you wait for the best moment to open the trade, or close the trade. This is typically applied as traders wait for a downtrend to end and for confirmation a new uptrend has started. There is no rush. This ability to wait for the best opportunity is the most important advantage enjoyed by a private or independent trader. This planning and time advantage distinguishes these situations from those appropriate for other strategies.

    Strategies 7 through 12 are designed to recognize and take advantage of opportunity. This includes detailed examination of opportunities where we wait in ambush ready to capture brief and well-defined trading opportunities. Some of this is short-term snatch-and-grab or ambush-style trading.

     It also includes the unexpected opportunities created when prices suddenly explode upwards in a bubble or a parabolic trend. This carries price action well above the trend line, offering significant profits. We examine techniques to recognize and maximize the return from these opportunities.

     Strategies 13 through 18 are offensive approaches to the market. We still have time on our side, and the resources, but rather than wait for the opportunity to develop, we aggressively create the circumstances necessary to lock in profits. Understanding order line behavior and the obligations of market makers helps develop successful offensive trading strategies. This is a direct attack on those forces which prevent us from collecting a profit. Taking the offensive delivers profits.

Strategies of disadvantage

    Other strategies cannot be used by traders to defeat the market. These are the strategies used against us, and which inhibit our success. The market does not consciously apply these strategies, but the impact of market activity is the same. There is an advantage if we recognize when our successes is disabled by the implementation of one of these strategies. Awareness gives us protection so we can develop appropriate defensive responses. Strategy 31, Beauty Scheme, is not an ugly stock disguised as a beautiful trade. It describes the situation where our trade management judgment is influenced by our emotional attraction to the prospect of great returns. It is a strategy applied against us so we defend ourselves by recognizing the strategy and creating trading processes to reduce the ability of emotions to influence our decisions.

    Strategies 19 through 24 apply when we do not have the advantage of time or resources. Our profits are under constant attack from market forces so we need to escape quickly. Our victory comes from the way we escape from a trade, taking profits with us. Careful understanding of order line behavior and the reactions of our opponents on the other side of the trade provides a strategy for closing a trade in thin markets. The objective is to confuse the opponent so we can make an escape on our terms without damage. This includes protecting a profit, or cutting a loss quickly in adverse conditions. Strategies 25 through 30 are deception strategies. They are most commonly used against traders so we must learn to recognize them. The market applies these strategies with success and many traders lose. Inadvertently we also apply these strategies to ourselves and our success is blunted by psychological factors.

     On occasion we want to avoid becoming a victim, but on other occasions careful participation in these unfolding market events delivers substantial rewards. Bubble and momentum trades are a type of deception created by market forces. Prices move quickly above reasonable value. If we recognize this deception we can apply better tactics to trade such events without falling victim to the deception. Fast and powerful profits are available for those who are aware. Rapid and substantial losses are delivered to those who are deceived by this market activity.

     Strategies 31 through 36 are desperation strategies. Apply these when everything appears to be going against you. In a very important sense, the market is always against the trader. Every trade has three possible outcomes, but only one of these delivers a profit. Once a trade is opened, price may move down, move sideways, or move up. Only an upward move in price delivers profits because even a sideways price movement is a losing trade due to commission and transaction costs. The odds are stacked against the trader 2:1.

     Despite this, financial trading is not constantly mired in desperation. The six desperation strategies are applied only when appropriate. They include a deliberate strategy of entering a trade after the real trend break has commenced, and exiting after the trend has ended. This apparent self-injury scheme is an important way to manage the greed that poses a constant danger to our trading success.

     The objective in war is total victory. This is not possible in the market. There is never a total defeat and subjugation of the enemy. Every day the trading challenges continue in an ongoing battle. Our objective is to remain consistently profitable, and in this book we substitute this objective for that of total victory. The application of these 36 strategies helps us to survive, prosper and win in the face of ongoing adversity.     Some trading situations lend themselves to a single strategy solution. Many trading situations are successfully resolved using a variety of strategies. Some trading situations require the application of a combination of strategies. For the purposes of this book we have focused on trading events where a single strategy is clearly illustrated.

     Unlike books dealing with business studies based on failed or successful companies, it is difficult to find external examples of trading tactics. Trading tactics are personal, and the best books are written by those who trade and know the taste of fear. This cannot be an armchair analysis based on carefully constructed assumptions. Real trading reduces academic theories to tatters as the market creates conditions that challenge theory and practice. I learnt the application of these strategies the hard way — in the market. I have been a victim of some of these strategies. I have applied other strategies successfully to manage exits in thinly traded stocks, or to enhance the success in a trade.

    In a world that seems information-rich and time-poor it is all too easy to ignore the context of our activity. The financial market is a dangerous and rewarding place. Consistent success demands mastery of technique, of trading discipline, and of ourselves because we operate in an area where greed and emotion are unfettered. It may appear the struggle for survival is based on lightning fast reactions to each emerging crisis, but this is incorrect. The 36 Strategies of the Chinese gives traders a means to lift their head above the skirmish activity inherent in every trade and focus on the wider context of their relationship with financial markets. The 36 Strategies of the Chinese are strategies for success in financial markets and I encourage you to use these observations to improve your trading activity.

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