3M of trading

3 M’s of Successful Trading

In the last Article , we had seen an Introduction to trading . In this section we will see what are the 3 M’s of Successful Trading as per Dr Alexander Elder .

I will give brief introduction of each of it , Its your responsibility to take it further and learn it in detail . take this as just a starting point .

The 3 M’s are :

– MIND 
– METHOD– MONEY

MIND 
This part of Trading is most important . It deals with Psychology . When one enters Trading business , he/she has some beliefs about the environment , about markets . They have to understand the importance of Discipline , How people think , how greed and fear affects investors . There are sub-parts to this

– Individual psychology of traders : You have to understand how to control Fear and Greed . How you should take rational decisions and not fall pray to your emotions while trading .

– Mass psychology of the markets : You also have to understand how mass psychology works . Why most of the people do what they do .

– The rules for maintaining personal discipline : You also have to understand the importance of Self Discipline , why you must be always consistent with your trading . You must never violate your rules . because in long run your discipline in one thing which will make you most money , not your knowledge or your skills .

METHOD 
This is the part which deals with your knowledge about market , technical analysis , other tools which you can use to make Entry and Exit from any trade . This part ispercieved to be the most important aspect and most of the people run after these a lot , but these are the least important part of your trading . Let us see part of this .
– Technical indicators : These deals with the tools available for making decisions , for example , MACD , RSI , Stocastics , OBV and other 200 weird words .

– The best chart patterns : Then you must know different types of patterns , which gives some idea about future action and how masses are thinking , some examples can be double top , Head and shoulder pattern etc .

– Developing a trading system : Then finally after you are done with knowledge part , you should build up your trading system . what is trading system ? Its your rules for buying ,selling , booking profits and cutting losses .

MONEY

Now this part is an amazing one and my favorite  . What this determines is how will you manage your money , it decides how much money will put in market at any given time , and how much loss will you take maximum on any given trade . How much will be your maximum loss on any one trade, things like that .

Basically this part decides how long can you in the game of trading if things would go wrong . This part is extremely important . Without proper money management no can can survive for long in Trading . Lets see some basic and widely accepted views .

– The 2% Rule for individual traders : This rule days that on any given trade your loss should not exceed 2% of total capital . So if you have Rs 1,00,000 , first time your loss should not be more than 2,000 . This rule makes sure that even if you make long series of loosing trades , still you are in the game . Even if you make 10 consecutive loosing trades , your overall loss will be 18.3% , Though this will be rare , still you take care of this situation .

– The 6% Rules for every trading account : This rule says that your monthly loss should not cross more than 6% in a month . Sometimes when you trade it may happen that there is some problem with your analysis or some issue between you and market which can not be explained , you keep trying to win , but dontsucceed , that time you have a great urge to revenge trade and get your money back . The best thing at that time is to stop and get some rest , go for vacation and come back with fresh mind . This rule will make sure that if your chemistry with market doesnt fit , you stop after loosing 6% of your capital . You can choose your own percentage amount . I would like to choose 12% for me . it all depends on your risk appetite and stubbornness 

You might be interested in my previous money management example

– Essential record keeping for success : This part says that you should always keep all the information regarding each trade . Buy price , sell price , date of purchase , how many days you carried , Reason for buy , reason of sell , what you learned from the trade , chart at the time of buying , charts at the time of selling etc etc .

Why do you do this ? Record keeping makes sure that any day you can go back to your records and see what kind of mistakes you have done, why some trade failed , why you succeeded in some trade ? you can get lots of information from your records , you need to analyse your performance over days/months/years .

Its extremely important , after a series of trades when you look back to your records , you may be able to find out some pattern , some particular aspect or mistake which you do with each loosing trade and hence can take corrective measures .

So , finally we are done with 3 M’s of successfultrading . Professor Van Tharp , in this legendary book “Trade your way to Financial Freedom” talks about how the weightage they would give on these 3 M’s . According to him in Trading the importance factor is like this

Mind : 60%Money : 30% Method : 10%

Its totally opposite of what people perceive it to be , general people think that having all market knowledge and technical analysis is most important . nothing is far from truth , It wont be too ambitious to say that you can make money in market by simple coin toss if your have sound money management Techniques and Great control over your self , you need to cut your loosers short without any emotion and let your profits run till they can by sitting tight and doing nothing .

Conclusion

So finally if you want to start learning Trading , Work hard on your Psychology part and money management techniques , Technical analysis and other knowledge is important but not vital !! .

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