Dr. Alexander Elder – 3 M’s of Successful Trading

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Day trading technical analysis

How to Understand Technical Analysis: Discover Technical Analysis

In finance, technical analysis is a system for anticipating price direction based on prior market data, particularly price and volume.
Many of the instruments used in behavioral economics and quantitative analysis are also used in technical analysis, which, as a part of active management, contradicts much of contemporary portfolio theory.
The efficient-market theory, which claims that stock market prices are inherently unpredictable, challenges the usefulness of both technical and fundamental analysis.

We saw an introduction to trading in the last article. In this section, we will look at Dr. Alexander Elder’s three M’s of Successful Trading.

I will offer a quick overview of each of them; it is your obligation to learn more about them. Take this as a starting point only.

MIND METHOD MONEY MIND are the three M’s.

This is the most significant aspect of trading. It is about psychology. When one starts the trading profession, he or she has certain views about the environment and markets. They must comprehend the significance of discipline, how people think, and how greed and fear effect investors. This is divided into sections.

# Traders’ individual psychology: You must grasp how to handle Fear and Greed. How to make reasonable judgments when trading and avoid succumbing to your emotions.

# Market mass psychology: You must also grasp how market mass psychology works. Why do most individuals do what they do?

# Personal discipline rules: You must also comprehend the value of self-control and why you must be constant in your trading. You must never break your own rules. because it is your discipline, not your knowledge or talents, that will make you the most money in the long term.

METHOD

This section deals with your market knowledge, technical analysis, and other tools that you may use to enter and exit any transaction. This is thought to be the most significant feature, and most individuals go after it relentlessly, yet it is the least crucial aspect of your trade. Let us look at a portion of this.

#Indicators of technical strength:

These cover the decision-making tools accessible, such as MACD, RSI, Stocastics, OBV, and other 200 strange phrases.

#The most effective chart patterns:

Then you must be familiar with many patterns, which provide insight into future actions and how the people are thinking; such examples are the double top, head and shoulder pattern, and so on.

#Creating a trading system:

Finally, once you have completed the knowledge portion, you should construct your trading strategy. What exactly is a trading system? It is your set of rules for purchasing, selling, profiting, and losing money.

See my series of articles on “How to Be a Better Than Average Investor” for more information on various technical tools.

MONEY

This is my favorite and most stunning portion. This dictates how you will manage your money, how much money you will put in the market at any one moment, and how much loss you will accept on any particular transaction. What is your maximum loss on any one deal, for example?

Essentially, this section determines how long you can stay in the trade game if things go wrong. This is an incredibly essential section. No one can thrive in trading for long without effective money management. Let us look at some fundamental and generally held beliefs.

# Individual Traders and the 2% Rule:

This rule states that your loss on any particular deal should not exceed 2% of your entire capital. So, if you have Rs 1,000,000, your first-time loss should not exceed Rs 2,000. This rule ensures that even if you make a string of losing transactions, you will remain in the game.

Even if you lose 10 consecutive deals, your cumulative loss would be 18.3%. Although this is unlikely, you should be aware of the scenario.

# The 6% Rule applies to all trading accounts:

This guideline states that your monthly loss should not exceed 6% every month. When you trade, it is possible that there is a problem with your analysis or a problem between you and the market that cannot be explained, and you continue to attempt to win but fail. At that point, you have a strong desire to revenge trade and recover your money back.

The best thing to do at that point is to take a break, go on vacation, and return with a clear head. This guideline ensures that if your chemistry with the market does not match, you will cease after losing 6% of your capital. You may select your own percentage amount.

I’d want to select 12% for myself. It all relies on your risk tolerance and tenacity.

You might be interested in my prior example of money management.

# Important record keeping for success:

This section states that you should always maintain all of the information related to each deal. Buy price, sell price, date of purchase, number of days carried, reason for buy, reason for sell, what you learnt from the deal, chart when purchasing, chart when selling, and so on.

What motivates you to accomplish this?

Record keeping ensures that you can look back in time and discover what type of mistakes you made, why certain trades failed, and why you succeeded in others. You can learn a lot from your data if you analyze your performance over days, months, and years.

It is critical that you review your records after a series of trades in order to identify any patterns, specific aspects, or mistakes that you make with each losing trade and so take remedial action.

Finally, we have completed the three M’s of successful trading. In his classic book “Trade Your Way to Financial Freedom,” Professor Van Tharp discusses the importance of the three M’s.

According to him, the most important component in trading is as follows:

Mind : 60%
Money: 30%
10% method

It is the polar opposite of what most people believe; most people believe that having complete market knowledge and technical analysis is essential.

Nothing is too far from the truth, it is not too ambitious to say that you can make money in the market by simply tossing a coin if you have sound money management techniques and great self-control, you need to cut your losers short without any emotion and let your profits run until they can by sitting tight and doing nothing.

Conclusion

Finally, if you want to start trading, work hard on your psychology and money management strategies. Technical analysis and other expertise are useful but not essential!!

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