Mind, Method & Money Management - "The Three M’s"

Alexander Elder is one of the best trading authors of our time. In the past few decades, his books have sold millions of copies globally. In Come Into my Trading Room, he writes about the three M’s that make a successful trader.

This is a very useful book from which we have also excerpted some steps that every new trader should keep in mind to achieve their goals.

In this article, we will cover these M’s and explain why all traders should strive to have them.

#1 - Mind

The first M stands for the mind. Like We have written since long time here, the success of your trading career come from the mentality.

The mind plays a very important role in determining whether a trader is successful or not. This is because all traders first consult their brains before opening or closing a trade. Unfortunately, most traders come to the trading world with the wrong perception about the market.

Related » The 3 Most Common (& Costly) Psychological Mistakes

The worst mindsets for novices

Some start trading believing that anyone can make money without the required training. Others believe they can make money buy just buying and selling currencies or commodities without doing any analysis or without doing any research about the rate of success of traders. Others come to the market with little amount of money (and this is the least harmful).

To control this problem, a trader needs to change his thinking of the market. They need to take the financial market as a normal market where traders make and lose money. And they need to treat trading like any other job, not a hobby.

This can be achieved by taking time to read and be mentored by someone who is already successful. Doing this will help them understand the risks that exist in trading. It will also prepare them psychologically.

#2 - Method

In other words, this is the analysis. To have a successful trading career, you need to have a good method of doing your analysis before buying or selling an instrument.

You need to have a reason for doing any transaction. In this, We mean that you must always have a reason when buying, holding, or selling short an instrument (and you have to make a note in a trading journal about this).

The key to success here is the analysis aspect. This analysis should either be sentimental, fundamental, or technical analysis.

Ways to do the analysis

For a trader, technical analysis is a very important tool to use. The secret to be successful in this is to select a few indicators, create the parameters, and then observe them always before making a transaction.

There are hundreds of technical analysis tools out there. A common mistake many traders do is to focus on tens of indicators per trade. The secret is to select a few indicators (say 4) and then master them over a period of time. Then, you should use these indicators carefully.

For fundamental analysis, you should be very careful. You should always have your eyes on the news and the calendar. For the news, when you have a trade in and then a negative news comes, you should know the value of exiting the trade. Doing this will help you reduce your chances of losing a lot of money.

Related » Top Free Sources to get Financial News

#3 - Money Management

The third M, according to Alexander Elder is money management. You can be an excellent trader but if you don’t have excellent money management skills, chances are that you won’t achieve success in your trading career.

Money management will help you minimize the amount of money you risk or lose. This is simply because no matter the skills you have as a trader; chances are that you will lose money.

If you have excellent money management skills, you should only lose money that you can comfortably lose. The common rule is that you should only risk 5% (or less, like the 2% rule) of your money per trade.

Another concept is on the minimum balance that you have in your account. Even after a big win, you should avoid the situation of irrational exuberance. Doing this will lead you to higher losses.

Finding the right balance

An important fact you need to know is on the balance between these three. Ideally, you should ensure that you are perfecting yourself in all the three areas. For example, assume that you have 70% skills in money management and 30% method and mind, you will not be a good trader or investor.

If you have 80% of money management and 10% of mind and method, you can miss a lot of good chances. If you have the method but lack the mindset, you probably won't be able to use your strategy (perhaps because you are overwhelmed by some of the biases we have talked about).

However, if you take time to perfect your method, mind, and money management, you will be at a good position to succeed in the industry.

Summary

Obviously, it is difficult to measure these ratios. The secret is to embrace a journey of constant education. You can do that by having a trading journal where you write down all your trades and thoughts. When you do that, you will be at a good position to identify your weakness and strengths.

Another way is to have a mentor who has been in the industry for a long time. Reading books can also help you identify your areas of weakness and how to improve them.

External useful resources

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