SunTzu &The Art of War -- The Nine Situations
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The Nine Situations
(The Nine Varietis of Ground)

"The art of War recognizes nine varieties of ground: dispersive ground; facile ground; contentious ground; 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 the soldiers, being near to their homes and anxious to see their wives and children, are likely to seize the 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."

Portfolio Management and Risk Management Corollary:

Maintain disciplined evaluation of on-going market conditions, in each instrument traded, even when 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."

Portfolio Management and Risk Management Corollary:

Profitable trades tend to be profitable from the onset. Loss trades tend to be losers from the onset. 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."

Portfolio Management and Risk Management Corollary:

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."

Portfolio Management and Risk Management Corollary:

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 of the 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.

Portfolio Management and Risk Management Corollaries:

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

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

Preserve And Protect Resources

"When an army has penetrated into the heart of a hostile country, leaving a number of fortified cities 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 your army with food."

Portfolio Management and Risk Management Corollaries:

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

When in the midst of a successful portfolio management and risk management campaign, be diligent in realizing gains, as the market provides the opportunity, and utilizing those gains to maintain portfolio management and risk management resources.

Focused Knowledge And Experience

"Mountain forests, rugged steeps, marshes and fens--all country that is hard to traverse: this is difficult 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 energy and hoard your strength. Keep your army continually on the move, and devise unfathomable plans."

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

Portfolio Management and Risk Management Corollary:

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

Catastrophic Loss Protection

"Ground that is reached through gorges, and from which we can only retire by tortuous paths, so that 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."

Portfolio Management and Risk Management Corollary:

Avoid being forced to trade in this type of situation, unless have pre-positioned through option strategies. If it looks like we are crosswise of the market's bias, liquidate. Otherwise, will soon be in 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 is desperate ground."

"On desperate ground, fight."

"On desperate ground, proclaim to your soldiers the hopelessness of saving their lives. The only chance 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 hard when he cannot help himself, and to obey promptly when he has fallen into danger."

Portfolio Management and Risk Management Corollaries:

The limitation of applying this War principle to our portfolio management and risk management effort is that in war an individual soldier, through desperate action, may have an impact on the enemies movement. But, in portfolio management and risk management our actions as individuals, 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 given strategy we choose to implement. Therefore, in trading, our objective is not to seek to enter desperate ground prepared to "trade till capital is exhausted", rather, it is to impact the outcome of the strategy by having a well organized strategy, the patience to wait for the markets to provide a 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 find ourselves in desperate situations, we will also find that we have failed to manage our risk through protective measures. Therefore, we must, at all costs, be disciplined in managing the risk of every strategy 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 found in 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 spirit of 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 must reach."

"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."

Portfolio Management and Risk Management Corollaries:

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

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

Discipline, efficient, and effective organization, along with opportunistic and flexible utilization of all 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."

Portfolio Management and Risk Management Corollary:

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, yet, consistently within a sound framework of principled guidelines. Markets can be viewed in a similar manner. All markets experience price movement, yet each one moves in its own unique way. 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 thus maintain order."

Portfolio Management and Risk Management Corollaries:

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

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

Opportunistic Flexibility In Adapting Strategies And Tactics To Situation

"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 or defensive tactics; and the fundamental laws of human nature: these are things that must most certainly be studied."

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

"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 a decisive battle."

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

Portfolio Management and Risk Management Corollaries:

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, is to become engaged as a part of a well thought out portfolio management and risk management plan 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 market provides

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

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

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