For me, author, teacher, and full time trader Alexander Elder really brought my trading together in a way no other author had. He gave me the framework to build my entire trading plan around: THE THREE M’s: Mind (psychology), Method (a trading edge) and Money (risk or money management).
But what does each of those things mean? Many of these answers came from other great traders sharing their wisdom in books and my own successful trading through all types of markets with bigger and bigger accounts that created a need for me to up my game and get better and better.
Mind (psychology) You must have the right winning mind set to make it in trading.
Discipline to follow your trading plan.
Perseverance to keep going through the losing periods.
Faith that your trading method works.
Method (a trading edge) Your system must have a proven historical track record to grow capital.
Robust Trend Following systems: Proven to grow capital over the long term, trading price as a leading indicator.
CAN SLIM: Legendary trader William O’Neil has spent a lifetime studying what really makes money in stocks.
Darvas System: This simple system has all the principles of successful stock speculation.
Money (risk or money management) Never bet your whole account on any one trade. Your account must be able to sustain multiple losses with out going to zero.
Manage the risk of ruin. Never risk more than 1%-2% of your capital on any one trade.
Never expose more than 6% of your total capital to losses at any given time through multiple trades. (With the use of stop losses)
Risk/Reward ratio: Your winners must be expected to be bigger than your losers to win in the long term. (A 3:1 profit ratio)
Carefully manage position size so you are not over exposed to a large unexpected move against you due to volatility.