The 3 M’s of trading: Mind, Money, and Method, maybe you have heard of them, maybe not. Either way, in today’s lesson you are going to learn what they mean and why successful trading requires them.
All three of the M’s are equally important, and you can think of them as the three pillars of trading and the backbone of your trading business plan. Without one of them, your trading foundation will not hold, and you will not succeed. You need all three of them working together to make money as trade.
The Mind part of the 3 M’s essentially means developing psychological ‘rules’ that will keep you calm amidst the noise and constant temptation of the markets. Everything begins (or ends) with your trading mindset.
You cannot make money over a period of consecutive months if you are not in the proper trading mindset. Many things go into achieving the proper trading mindset, and I have written about this topic extensively. However, if there is one over-arching theme that you need to understand in regard to your trading mindset, it is self-control.
Most of the trading can be boiled down to your ability or inability to control yourself in the face of the near-constant temptation to trade, because most of the time, doing so means you will inflict harm on yourself.
As a trader, speculating in the markets, an endeavor that is obviously very risky, it is up to you to control yourself, and this ability starts with the mental understanding of what you are doing, what is possible and what you are risking.
The Money part of the 3 M’s refers to money management, of course. This encompasses both risk and reward; some of the ways to manage your money includes the following:
Getting your money management down is heavily dependent on having the proper trading mindset, as well as having a firm understanding of what money management actually means. It means:
- You always think about risk before reward.
- You know what you’re per trade risk amountis and you never exceed that amount. This should be a dollar amount that you are mentally and financially able to lose on any given trade safely.
- You understand how to place stop losses properlyand how to manage your position sizes.
- You have a clear understanding of how to place profit targets and an overall strategy for exiting a potentially harmful trade.
- You understand how to calculate the risk-rewardon trade, and this also means you know sometimes a trade won’t be worth taking if the risk-reward doesn’t make sense.
Money management can be thought of as the ‘glue’ the 3 M’s because it really holds everything together. If you do not have proper money management, your mindset is going to get out of whack quickly. Also, your method will become irrelevant almost, if you do not manage your money correctly. So, if you want to make everything much, much easier on yourself, focus on managing your money, especially your risk, the most.
Understand that capital preservation is really the key to money management. Capital preservation means managing your trading capital so that you are not using too much of it on anyone trade and that you are not using it too frequently. Essentially, you want only to use your trading capital when a very obvious / high-probability trade comes along because then you have more capital to use on better trades. Don’t blow your trading capital by over-trading.
The Method part of the 3 M’s is how you trade the market. What is your approach or method for analyzing prices and making decisions about when to trade and when not to? You must have an effective trading method, but what is an “effective trading method” and how do you know if yours is or not?
The simplest way to judge whether or not your trading method is effective is to demo trade it for a couple of months and see what kind of results you are getting. One caveat here, however; makes sure you are following the method as it was taught to you and not over-trading. This means not trading without any insight or opportunity.
Now, there are many different trading strategies and methods out there. Ultimately, you have to find one that is
B) You personally enjoy and that works well with your personality and schedule.
Forex trading is amazing, attractive and can yield a lot of returns. Money management, mindfulness, and proper methodologies are some of the success factors related to profitable forex trading. Deployment of right strategies at the right time with the correct mindset can be very profitable for the forex trader.