The following is an excerpt from Jeffery Tie's new book 'Aiki Trading' - Trading in Harmony with The Markets.

This book is written for the serious beginner who is searching for a basic primer in understanding market behavior and applying this knowledge to trade in the financial markets. The concepts covered in this book are based on the foundational course that I conduct for SGX Academy.

It is important that I clearly state what this book will and will not achieve, so that you, dear readers, can decide whether this is what you need and desire. Perhaps an analogy here will illustrate what I mean.

In the learning of Japanese martial arts, the beginner student is usually taught one basic technique. The student learns and internalizes this single basic technique so that he can respond to a specific combat situation. If this combat situation is altered, then the initial technique may not provide the student with a satisfactory solution. He needs to learn new techniques and then internalize them with his existing knowledge in order to widen the combat situations that he understands and can properly respond to.

So it is with trading, and my approach to teaching and learning trading techniques. Financial markets are complex, and the way the markets can behave is also complex. It will be extremely difficult, if not impossible, for any beginner to gain immediate mastery of complex market behavior. The logical solution is to break down the complexities into bite-size basic building blocks. As the student progresses, additional knowledge is acquired and existing knowledge built upon, allowing the student to begin understanding ever more complex situations.

Obviously, the path to mastery (in both martial arts and trading) will be paved with hard work and sacrifice. Many will start, but only the determined few will eventually succeed. So if you are looking for instant success or if you believe that the mastery of trading is easy, then this book is probably not for you.

THE PHILOSOPHY OF AIKI TRADING

This book links trading in the financial markets to the principles and philosophy of aiki, which means ‘‘harmony’’ in Japanese. Aikido is the martial art that best exemplifies the concept of aiki. The life philosophy as expressed through aikido, and indeed through any other martial art, also promotes core values and molds the character of its proponents. Discipline, tenacity, focus, and commitment are but a few of these values and characteristics that the dedicated martial arts student will build and nurture. These are also some of the same values and characteristics that are essential for success in any other life endeavors, including trading in financial markets.

After many years of practice in both Japanese martial arts and in trading the financial markets, I have noticed great similarities between the principles and philosophy of the two.

On the surface, the casual observer may say that both disciplines are diametrically different. However, long-term practitioners acknowledge the many commonalities.

Richard McCall, in his book The Way of the Warrior Trader, published by John Wiley & Sons, encapsulated these similarities in his ACTION acronym. I have adopted and amended this acronym to reflect the principles by which I believe the successful martial artist and the successful trader should live by.

A for Acceptance

The martial artist must accept that his path to mastery will involve discomfort and even pain in the dojo (training hall). The aspiring trader must accept that both loss and profit are the only outcomes in the uncertain arena of trading and that financial pain and pleasure will be part and parcel of his learning experience. Both the martial artist and the trader have accepted that the path to mastery will require commitment of time, effort, energy, and resources. Chinese wushu practitioners will recognize the same concepts in their term, ‘‘eating bitter.’’

C for Calmness and Clarity

Calmness and clarity are qualities that all martial arts practitioners strive to achieve. The calm warrior will be able to meet the challenges of strife and combat with a clear mind. A clear, calm mind allows the martial artist to move with trained reflex responses in the face of danger. Similarly, the trader whose mind is calm and clear will be better prepared to correctly respond to the emotional dangers that the financial markets are well known for. Greed, hope, fear, and despair have devastated many traders in the past and will continue to devastate many aspiring traders in the future. Successful traders must meet these four apocalyptic horsemen with calmness and clarity in mind, spirit, and action.

T for Trust in Training

The martial artist has trust that his training will produce the correct winning response in combat. Similarly, the aspiring trader who perseveres in his practice of a good trading method will eventually gain confidence, and will trust in his abilities through disciplined training.

I for Imagination

Every successful person in any endeavor must have belief in their eventual success. Belief must first start as imagination. The successful martial artist or trader must combine both dedicated disciplined effort with specific visualization through the imagination of what success will be like for him. Cogito, ergo sum (Latin for ‘‘I think, therefore I am’’) will be the mental spur for any successful person.

O for Only

I was training with my shinkendo sword instructor Lonnie sensei. We were practicing contact sparring with wooden bokken. Sensei’s attack was fast, and my mind and body were not able to correctly respond in time to his strikes. Sensei admonished me. ‘‘Don’t live in the past. It is over, so forget it.’’ Facing him again, I next tried to anticipate his attack. But instead of blocking where I thought his attack would be, I was hit by an unexpected strike. Sensei again admonished me. ‘‘Don’t live in the future, it has not happened yet! Only live in the now.’’ For the aspiring trader, ‘‘Only live in the now’’ is a good mantra. Living in the bitterness of prior losses or living upon past glories will never lead to the mindset changes that success will require of us. Living exclusively in the future at the expense of the present will also be detrimental to one’s success. We need to learn from the past, and correctly imagine the future, but not at the expense of the present.

This is of particular importance to a trader. When the market goes against the original hoped for result, many traders live in the past and continue to pray that their desired result can still occur, and ignore what is actually happening in reality. Then, there are also occasions when the trader tries to anticipate what the market can do, effectively ‘‘living in the future’’ instead of waiting for his method to activate and trigger the trade, which is the ‘‘living in the now’’ entry. They then find that they have entered a trade in anticipation, but soon discover that the proper signal did not actually occur yet!

N for Never

The samurai ethos is one in which the warrior is always prepared to face his own mortality, his own death. This did not mean that the samurai were morbid or morose. On the contrary, the samurai embraced life and lived life well. But in order to face death, a samurai had to live life without regrets. The creed was to never look back once action had started; so too for the trader. Once in a trade, he must never look back with or at the regrets of the past.

The trading principles of the aiki Trader require the practitioner to understand the nature of market behavior, and to act in harmony with the market.

In a continuing uptrend, my preferred form of aiki trading will buy the corrective dip. The aiki trader enters and attacks the weak seller at the correction’s end, and is entering in harmony with the major uptrend. Similarly, in a continuing downtrend, the aiki trader will sell the corrective rally.

In a continuing sideways or range bound market, the aiki trader will buy the floor and sell the ceiling precisely because he recognizes that the selling force weakens at the support, and buying forces weaken at the resistance. This will allow him an attacking entry directly into the weakening force.

The principles of aiki trading will require the trader to competently execute his trading plan, which must be based on a solid understanding of kihon, or ‘‘basic fundamentals,’’ of market behavior. In other words, success in trading, indeed in any life endeavor requires the practitioner to:

1. Know what to do;

2. Do what you know; and

3. Do it flawlessly.

Remember, there is no ‘‘silver bullet’’ or ‘‘secret manual’’ or ‘‘Holy Grail’’ that confers immediate success. Only determination and the correct practice of a robust method can lead to eventual mastery and success.

Click on the link above to access an exclusive deal for The Educated Analyst subscribers -  10% discount on Jeff's new book 'Aiki Trading'. 

ISBN: 9780470825815/ Aiki Trading: Trading in Harmony with Markets (Copyright 2010 by Jeffery Tie. Reproduced with permission of John Wiley & Sons, Asia.

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