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Trading Guide by Spencer Li
The 3 Ms of Trading: Method, Money, Mindset
The 3Ms of Trading are Methodology, Money Management, and Mindset, which each play a crucial role in your success in trading. As a trader, you will need to master all 3 Ms, but you also need to know the relative importance of each factor.
In this post, I will explain how each factor affects your trading success, and which factors you should be focususing on to improve your trading.
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Methodology (10%)
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Money Management (30%)
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Mindset (60%)
Methodology (10% focus)
Methodology refers to your method of analysis, your strategy, your setups, basically the basis on which you make your buying and selling decisions.
For now, all you need to know is that the most common tools used to make such decisions are technical analysis, fundamental analysis, or some combination of both.
Money Management (30% focus)
Money management, or risk management, refers to how well you use your trading capital, to maximize your returns, while at the same time minimizing your risk. This includes your capital allocation per trade, such as the 2% money management rule, and also things like risk paramaters for each trade, such as maximum drawdown limits.
This means that for each trade, you will need to decide on the entry price (EP), stoploss price (SL), and target profit (TP) before you make each trade, so that you will be able to calculate the reward-to-risk (RR) ratio to decide whether it is worth taking the trade.
To be profitable in trading, all you need is a good balance between the win ratio (aka. hitrate) and the reward-to-risk ratio, to ensure that you have a net positive expectation on every trade. For example, if you have a 40% win ratio, and your reward/risk ratio is 2, you will still end up net profitable in the long run.
Mindset (60% focus)
The mindset, or trading psychology, is definitely the most important aspect of trading, and it is also the hardest to master. This will determine how well you can make good decisions under stress, and consistently execute your trading plan without getting swayed by emotions.
Thinking accurately requires a certain level of self-awareness so that we can avoid any behavioral biases that skew our rational thinking and decision-making process.
Conclusion 📌
In conclusion, to be successful in trading, you need to master all the 3Ms, but the problem for most traders is they only tend to focus on 1 or 2 factors, and neglect the rest. As a result, they might become very good at analysing charts (methodology), but remain poor at money management and trading psychology.
To improve your trading, the faster way to do so is to work on whatever you are weakest at, because that has the most room for improvement. Now that I have shared the 3 important elements of trading, which do you think you are lacking the most, and will have the biggest impact on your trading if you work on improving it?
Let me know in the comments below!
Spencer Li
Spencer is an avid globetrotter who achieved financial freedom in his 20s while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience and has been featured on more than 20 occasions in the media.
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