Successful trading depends on the 3 M’s – Mind, Method ...



Successful trading depends on the 3 M’s – Mind, Method, and Money. Beginners focus on analysis, but professionals operate in a three-dimensional space. They are aware of trading psychology – their own feelings and the mass psychology of the markets. Each trader needs to have a method for choosing specific stocks, options, or futures as well as firm rules for pulling the trigger – deciding when to buy and sell. Money refers to how you manage your trading capital. Mind, Method, Money – trading psychology, trading method, and money management – people sometimes ask me which of the three is more important. It is like asking which leg of a three-legged stool is most important. Take away one of them and try to sit down.

Trading is the most exciting activity that a person can do with their clothes on. Trouble is, you cannot feel excited and make money at the same time. Think of a casino, where amateurs celebrate over free drinks, while professional card-counters coldly play game after game, folding most of the time, and pressing their advantage when the card count gives them a slight edge over the house.

A Typical Trade?

You buy 500 shares of Intel…suddenly the world is in living color! Intel ticks up half a point – you check quotes, run out for a newspaper, and tune in for the latest updates. If you have a computer at work, you set up a little quote window to keep an eye on your stock…….

…..Intel is up a point! Should you sell and take your profits? Buy more and double up? Your heart is pounding – you feel alive! Now it’s up three points. You multiply that by the number of shares you have and realize that your profits after just a few hours are close to your weekly salary. You start calculating percentage returns – if you continue trading like that for the rest of the year, what a fortune you’ll have by Christmas!

…..Suddenly you raise your eyes from the calculator to see that Intel has dropped two points. Your stomach is tied into a knot, your face pushes into the screen, you hunch over, compressing your lungs, reducing the flow of blood to your brain, which is a terrible position for making decisions. You are flooded with anxiety, like a trapped animal. You are hurting – but you are alive!

A Remedy for Self-Destructiveness

Are you sabotaging yourself? The only way to find out is to keep good records, especially a Traders Journal and an equity curve…..you need to become a self-aware trader. Keep good records, learn from past mistakes, and do better in the future. Traders who lose money tend to feel ashamed. Hiding doesn’t solve anything. Use the pain of a loss to turn yourself into a disciplined winner.

Losing Traders & Alcoholics

….Back in those days I had a busy psychiatric practice. I began to notice similarities between them and losing traders. Alcoholics and losers live with their eyes closed – both are in the grip of addiction. Every alcoholic I saw in my office wanted to argue about his diagnosis. To avoid wasting time, I used to suggest a simple test. I’d tell alcoholics to keep drinking as usual for the next week, but to write down every single drink, and bring that record to our next appointment. Not a single alcoholic could keep that diary for more than a few days because looking in the mirror reduced the pleasure of impulsive behavior. Today when I tell losing traders to keep a diary of their trades, many become annoyed.

Good records are a sign of self-awareness and discipline. Poor or absent records are a sign of impulsive trading. Show me a trader with good records, and I’ll show you a good trader.

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