Dr Alexander Elder is a trader and author of trading books (Trading for a Living, Come Into My Trading Room and Entries & Exits).
His explanation of trading in the book “Entries & Exits” is exceptional.
“Successful trading is based on three M’s – Mind, Method, and Money. Mind is your trading psychology; Method is how you analyze markets and make trading decisions; Money is risk control. The 3 M’s are like the legs of a three-legged stool; if anyone is missing, a person will end up on the floor.
Beginning traders, especially those with scientific or engineering backgrounds, tend to underestimate the importance of psychology.
Beginners are easily seduced by technical indicators, ut successful traders know that money management is equally important. The two pillars or risk control are the 2% and 6% rules. The 2% rule states that you may never risk more than 2% of your account equity on any single trade. For example, if you trade a $100,000 you are allowed to risk a maximum of $2,000. If the stock trade at $12 and your stop loss is at $10 then you are allowed to buy 1000 shares.
The 6% rule limits the risk in your account as a whole by stating you may never expose over 6% of your account equity to the risk of loss. For example, if you trade a $100,000 account and risk $1,000 on every trade, you may not have more than 6 open trades at any given time. “
To learn more, please read the book “Entries & Exits” by Dr Alexander Elder.
2 comments:
Alexander Elder is one of the best authors in the arena of trading literature. For a synopsis of his life and other books go to http://www.safe-options-trading-income.com/AlexanderElder.html
Good introduction. I haven't seen a review for a while that talked just about the risk management side, good to see.
A working calculator can be found at www.eldercharts.com
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