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TRADER'S NOTEBOOK


Trading Insights From "The Last Samurai"

05/03/04 03:14:36 PM PST
by Richard McCall

Traders can take some tips from the ultimate warriors.

As a moviegoer, I like to ponder the deeper meaning in most films I attend. Though sometimes there isn't much to ponder, the film I saw today — The Last Samurai — gave me cause for reflection. As a samurai historian as well as a futures trader, I have long held that the ways of the samurai offer today's traders many insights concerning our daily engagements of the markets. Let us take a look at some trading insights the film contains: it is the tale of a warrior, the last of his kind, who faces challenges and long odds against his success and survival. This already sounds like the conditions traders face each day in the markets.

Personal reflections

When was the last time you were in a fight? In all likelihood, your last fight happened yesterday, or even today. Surprised? Don't be. This describes many events of our lives — and especially trading. Trading is warfare, complete with its own tactics and strategies, victories and defeats, and those who engage in it are warriors. Because of this, more and more traders find themselves curious about the nature of the warrior philosophy, sometimes through the insights of history's most famous professional warrior, the Japanese samurai.

The trading insights that might be extracted from The Last Samurai fall into three groups:

  1. The samurai's action-oriented mentality (shinjutsu)
  2. The samurai's approach to developing personal mastery (shi-do), and
  3. The samurai's application of Zen Buddhism to prepare mentally, physically, and spiritually for battle (misogi).

Shinjutsu

I will focus on the most powerful of the concepts conveyed in The Last Samurai: the warrior's action-oriented mentality, shinjutsu. In order to make the samurai mentality easier to apply to trading, I have summarized this concept as the warrior-trader's ACTION plan (Figure 1): acceptance, center, trust, imagine, only, and never.

This easy-to-remember acronym of the samurai's most powerful insights can provide invaluable guidance for successful mental discipline when trading. Whether it is your emotions or behavior that needs help, a careful review of this plan can help you spot your trading psychology's weak points. Let's take a look at each maxim, and listen to what our trading coach, "the last samurai," might himself say to us about each.

Acceptance

The word accept reminds us that the samurai's most formidable trait was his willingness to forfeit his life to achieve victory. Total acceptance of the possible downside of any engagement sharply empowers the warrior. Ultimately, it eliminates the fear and self-doubt that would accompany a life-or-death confrontation.

In trading, there is a similar life-or-death feel when we enter a position — there is a potential for profit, but it could move in the opposite direction. Therefore, the first and foremost issue in trading should be the willingness and ability to accept that your position may move in a direction you had not anticipated before entering the trade. You could lose everything — or you could win it all.

Center yourself

There are three key components of our being: mind, body, and spirit. All three must be coordinated into our lives and our actions. Of these, the most neglected human component — yet potentially the most powerful — is the spirit. The samurai constantly sought to harmonize and focus — center — his ki (life force) with mind, body, and intent with literally every breath. This process was called misogi.

It is interesting to note that breathing has been connected to spiritual strength by virtually every culture known to man. Even the English word for breathing — respiration — means the process of renewing the spirit, according to its Latin origins. Therefore, before taking a trading position, our samurai trading coach would likely advise traders seeking greater confidence and composure to practice misogi by breathing into the pit of the stomach. The samurai called this the hara, or ocean of energy.

Trust your instincts

The samurai practiced their fighting systems constantly in order to commit them to the unconscious mind. Likewise, the principles and practice of swordsmanship and trading are similar. Both teach the practitioner to read the evolving situation, what tactical action to take, and when to take it and to do it all instinctively. To traders who want to improve their execution consistency, the word trust would serve as a reminder of the importance of paper-trading your system until the method's dynamics are ingrained into your subconscious.

The samurai trading coach would also emphasize the precept of suki, which is the readiness to take advantage of an opponent's defensive opening. Market-trading suki requires that the trader practice his or her trading method to the degree that he trusts it unquestioningly and until he develops a sixth sense about the kinds of market opportunities that the method is designed to capture.

Imagination

The imagination is the guidance system of our destiny. The samurai would never enter into battle having imagined his defeat. Likewise, traders should never take a market position imagining a trade that will go bad — that is, a trade with a loss greater than what is acceptable. Our samurai trading coach would likely teach his warrior-trader sempai (personal students) the importance of this mental discipline, and would encourage them to develop the willingness and ability to direct their imaginations to their greatest possible advantage.

The samurai called the directing of the imagination sakki, which was thought to direct the warrior's psychic powers of mind over matter (and situations). Our samurai trading coach would remind us that since the unconscious mind cannot distinguish the difference between a real and imagined event, when taking a position it makes sense to imagine a trade where losses are minimized and profits maximized. Further, using "positive outcome" imagery should be as much of a habit as any other of our behavioral traits. Therefore, it will take dedicated practice to master it, but once you succeed, the rewards will be more than obvious.

Only exist in the moment

The most common obstacle to success is fear. In its many forms and manifestations, fear leads to overanalysis, self-doubt, hesitation, and/or impulsiveness. The samurai learned to overcome this tendency through the practice of Zen Buddhism, a discipline that advocates existing totally in the moment. Thus, the letter "O" in the Action acronym reminds us of the importance and benefits of staying in the present while trading the markets.

Almost all the fear we experience is either anticipatory or reflective. It is the result of either living in the past or in the future, neither of which has any bearing on the present. The last samurai would advise modern traders that they would rarely experience debilitating fear if they were to concentrate exclusively being in the present. If market mastery is ever to be realized, the ability to focus is essential. To the serious trader, it could mean the difference between eventual success — or potential ruin.

Never second-guess

Even after receiving a mortal injury, the samurai were considered dangerous. This was because once the samurai initiated an attack, he would see it through to the end, even beyond his last breath.

The last samurai would emphatically tell today's traders that any trading position worth entering should be followed through till you exit. Further, he would stress that tentative entry into the markets can only lead to loss, destruction, or death. Once action was initiated, the samurai did not believe in fakeouts, tentative cuts with his sword, or early withdrawal from the battle. His decision to act meant he would see it through.

In a final and perhaps most important lesson under this category, the samurai trading coach would advise traders that after the battle was over, in victory or defeat, it is never helpful to agonize over what could have been. Looking back is only helpful in formulating future battle plans and for making adjustments to your tactical arsenals. Nothing more, and nothing less!

The final letter in our acronym serves as a reminder of the uselessness of "looking back" after the trade. Whatever is worth doing is worth seeing through to its conclusion.

Your plan of action

So there you have it. The samurai's ACTION plan summarizes the collective insights of history's most accomplished professional warrior risk-takers. These insights no doubt hold the same value for modern warrior-traders as they did for their warrior counterparts centuries ago.

But as with all wisdom, this plan requires study. It takes discipline, which is the true way of both the samurai warrior and successful trading. With enough hard work and dedication to the warrior disciplines and insights I have presented, these odds are not insurmountable. It is up to you to determine your ultimate destiny.

Richard McCall is the director of The Mastery Group International and the Warrior-Trader Alliance. He is an active futures trader and the author of the best-selling book, The Way Of The Warrior-Trader. McCall can be contacted at The Mastery Group website at www.MasteryNexus.com.

Current and past articles from Working Money, The Investors' Magazine, can be found at Working-Money.com.





Richard McCall


E-mail address: DrMcCall@MasteryNexus.com


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