Facebook
Twitter
Successful trading depends on the 3Ms – 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.
– Alexander Elder
Trading is not really all about stock picking, predictions, and opinions. It is not even just about a winning “strategy” (that word always makes me cringe).
Yes, first you have to understand how to trade and learn to put the odds in your favor of winning, but that is not always enough. There is also the risk-management component so that when you lose several times in a row your trading account does not end there.
You also need the confidence in your trading approach and method to be able to keep trading even when things are not working out and you are losing money. And yes, you will have losing trades and even prolonged periods of losing. It’s simply a part of being in the markets. It’s no different than a great hitter in baseball who has a slump.
But think about these basic notions in terms of dimensions . . . one, two and three dimensions.
Pitfalls of the One-Dimensional Trader
One-dimensional traders are those who just have opinions and make predictions.
If they are right, they win for a while, but they do not respect risk over their opinion so when they are wrong they eventually blow up their account. One-dimensional traders also tend to get emotionally invested and almost always eventually quit with the finger of blame pointed squarely at the stock that “got” them, or on the market. Blame is the “tell” of the one-dimensional trader.
Trading in Two Dimensions
Two-dimensional traders have a good method and generally cut their losses when wrong, but they have trouble with self-confidence and a true belief in their approach. They tend to blame themselves when their accounts have sharp drawdowns and they have trouble understanding that it’s a natural part of being a trader.
Two-dimensional traders understand the “X’s and O’s” of buying and selling but don’t understand the nature of a winning trader psychology. All traders can do is take their entries and exits as they come and let the market do what it does. Two-dimensional traders have not separated themselves from their trading. Generally, two-dimensional traders end up giving up because they cannot handle the psychological ups and downs of trading ̶ especially during periods of losing. Let’s look at the three-dimensional trader.
Traits of the Three-Dimensional Trader
The three-dimensional trader takes entries and exits based on their practiced and proven methodologies, manages risk carefully and rarely loses more than their predefined risk measures.
The “3D” trader’s self-worth and confidence is not tied up in any one trade. The three-dimensional trader truly understands that success in the markets is a long-term process with ups and downs.
Wins and losses do not change the 3D trader’s mindset. Much like a conventional business, trading positions are just inventory: the market gives and the market takes away, and the three-dimensional trader just takes what it is giving.