Extracted from the book: Come Into My Trading Room, Alexander Elder
To succeed in trading, you need several innate traits without which you shouldn't even start. They include discipline, risk tolerance, and facility with numbers. In additional, successful trading requires 3M's - Mind, Method and Money.
- Mind means developing psychological rules that will keep you calm amidst the noise of the markets.
- Method is a system of analyzing prices and developing a decision-making tree.
- Money refers to money money management, which means risking only a small part if your trading capital on any trade.
Trading is a journey if self-discovery. If you enjoy learning, if you are not scared of risk, if the rewards appeal to you, if you are prepared to put in the work, you have a great project ahead of you. You will work hard and enjoy the discoveries you'll make along the way.
The first Steps
Trading lures us with its promise of freedom. If you know how to trade, you can live and work anywhere in the world, be independent from the routine, and not answer to anybody. Trading attracts people of above-average intelligence who enjoy games and aren't afraid of risks. Before you rush into this exciting venture, keep in mind that in addition to your enthusiasm you will need to bring a sober understanding of the realities of trading.
- Trading will stress your feelings. To survive and succeed, you will need to develop a sound trading psychology.
- Trading will challenge your mind. To gain an edge in the markets, you will need to master good analytic methods.
- Trading will demand good mathematical skills. A math illiterate who can't manage risk is guaranteed to bust out.
Trading psychology, technical analysis, money management - if you learn all three, you can make it in trading. The market are set to separate the maximum number of people from their money. Stealing is not permitted but markets are heavily slanted in favor of insiders and against outsiders. Markets keep changing, and flexibility is the name of the game. Market operate in an atmosphere of uncertainty. There is no certainty, only odds. Here you have two goals - to make money and to learn. Win or lose, you have to gain knowledge from a trade in order to be a better trader tomorrow. Scan your fundamental information, read technical signals, implement your rules of money management and risk control. Now you are ready to pull the trigger. Go!
Good traders keep good records. They keep them not just for their accountants but as tools of learning and discipline. If you do not have good records, how can you measure your performance, rate your progress, and learn from your mistakes? Those who do not learn from the past are doomed to repeat it.
Showing posts with label Alexander Elder. Show all posts
Showing posts with label Alexander Elder. Show all posts
August 29, 2010
August 09, 2010
The 2% - 6% Money Management Rules
The greater staying power of traders the greater chance to win. Traders have to stay in markets long enough to win trades. Money management plays an important role in helping traders to survive in markets.
No one win every trades; money management help traders to reduce losses on losing trades. Moreover it also maximizes traders' gains on winning trades.
All traders have ever heard about how important the money management but the most of them are still losing in understanding money management strategies.
To make traders clear and be able to find strategies of managing money that suit to them. Let us talk about a couple of simple and easy money management rules.
The 2% - 6% rules of have been introduced in Dr. Alexander Elder's book "Come Into My Trading Room"
The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts.
Besides a disastrous loss, a series of losses can also damage traders' account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month.
These 2 rules are designed to protect traders from the two types of losses. Nevertheless the 2% - 6% would be change for each trader. For those who are able to accept the higher risk, they might adjust the 2% - 6% rules to 5% - 10%, where the 5% is used to protect the account from any single disastrous loss. While the 10% rules is used to protect traders from any series of losses in each month.
No one win every trades; money management help traders to reduce losses on losing trades. Moreover it also maximizes traders' gains on winning trades.
All traders have ever heard about how important the money management but the most of them are still losing in understanding money management strategies.
To make traders clear and be able to find strategies of managing money that suit to them. Let us talk about a couple of simple and easy money management rules.
The 2% - 6% rules of have been introduced in Dr. Alexander Elder's book "Come Into My Trading Room"
The 2% rule is to protect traders from any single terrible loss that can damage their accounts. With this rule traders risk only 2% of their capital on any single trades. This is for limiting loss to a small fraction of accounts.
Besides a disastrous loss, a series of losses can also damage traders' account. The 6% rule is lent to handle this. Traders have to set the maximum of accumulated loss for a month. When they reach that level of loss, they have to stop opening any new position for rest of the month.
These 2 rules are designed to protect traders from the two types of losses. Nevertheless the 2% - 6% would be change for each trader. For those who are able to accept the higher risk, they might adjust the 2% - 6% rules to 5% - 10%, where the 5% is used to protect the account from any single disastrous loss. While the 10% rules is used to protect traders from any series of losses in each month.
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