There is a Chinese saying that is inspired by a story from the Spring & Autumn Period in Chinese History. This was a period, during which the empire was divided between 12 warring states, so naturally, the story is about a battle.
The saying goes ‘Yi Gu Zuo Qi’, or The First drum roll to rouse the spirit & the story surrounds a battle between two forces, the Qi and the Lu. Qi was larger and more powerful than Lu, and Lu had little chance of defending itself.
As the battle approached, Lu devised an ingenious strategy that allowed them to defeat the superior force. Troops were instructed to wait until the third drum roll to engage in battle. As the battle begun, the Qi soldiers rolled the drums beckoning the opposing force to fight and then charged the battlefield. Lu did not engage.
A second time, the Qi rolled the drums, and again the Lu did not engage.
Finally, upon the third rolling of the drums, to the surprise of the Qi, a fresh and eager Lu force swiftly defeated an exhausted opponent.
Following the battle, the Lu councilor explained why he said to wait for the third rolling of the drum: “Fighting needs spirit. Their spirit was aroused by the first roll of the drums, but was depleted by the second. And it was completely exhausted by the third. We started to attack when their spirit was exhausted. That’s why we won.”
How many times has the market made you to feel like the exhausted force? Noise in the market beckons traders to take action, yet gives no price action to follow through. The trading range remains compressed and yet it is just wide enough for traders to lose money after repeated attempts.
As volatility remains suppressed at 30 year lows, we must make every effort to limit trading activity to when prices are up against a wall. Sub-optimal trades are stopped out, yet leave the possibility open that the trade was right. A trader finds small losses mounting into real money & is unable to pull the trigger as real range expansions are increasingly rare.
In such an environment, a trade must either be proven to be correct or falsified. Next time you find yourself in an expectant state of attention, looking for any reason to buy or sell, remember that it may just be the first rolling of the drums.
To accompany this piece, we’ve also prepared some thoughts on practical implementation, which you can read here.