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Successful trading is based on 3 Ms – Mind, Method, Money.

Mind refers to your trading psychology. You must follow certain psychological rules that lead to winning when faithfully applied and avoid pitfalls that become death traps for most losers.

Method refers to how you find your trades – how you decide what to buy or sell. Each trader needs a method for choosing specific stocks, options, or futures as well as rules for “pulling the trigger” – deciding exactly when to buy and sell.

Money refers to how you manage your trading capital. You may have a brilliant trading system, but if your Money Management is poor, you are guaranteed to lose money. A single unlucky trade can destroy your account if Money Management is not in place.

Trading psychology, trading method, and Money Management – people sometimes ask me which of the three is most important. I answer – imagine sitting on a three-legged stool. It is pretty stable, but try getting comfortable sitting on that stool after taking away any one of its three legs. Now please tell me which of the three legs is most important?

Traders go through three stages of development. When people first approach the markets, they usually focus on the method. Most of them do not survive this stage. They are too inexperienced and do not have anyone who can tell them how to stay out of trouble. No amount of optimized moving averages or fine-tuned trendlines will keep them alive in the markets.

Those who survive that stage acquire a greater sense of confidence. They acquire a method of selecting what to trade and the tools for analyzing markets and deciding when to buy or sell. Some become quite proficient in technical analysis, market indicators and systems, using computers to search on-line databases. Then the smarter survivors start asking themselves: if I am so good, how come I am making so little money? How come my account is up 20 per cent one month, and down 20 per cent or worse the next month? I clearly know something about the markets – why can’t I hold on to what I make?

Traders at the second stage tend to grab profits and buy something before their money evaporates in a series of bad trades. Then one day they look in a mirror and realize that the biggest obstacle to winning is the person they see in it. Impulsive and undisciplined trades with no protective stops lead to losses. A trader who survives the second stage comes to recognize that his or her personality, with all its complexes, quirks, and faults is just as much a trading tool as the computer.

Traders who survived that stage become more relaxed, quieter, not jumpy in the markets. They are now in the third stage – focusing on managing money in their trading accounts. Their trading system is in place, they are at peace with themselves, and they spend more and more time thinking how to allocate their trading capital in order to reduce overall risks.

The concept of the 3 M’s comes from my book Trading for a Living which has become an international bestseller. I met John Piper six years ago and enjoyed watching him grow and mature as a trader and a teacher of traders. It gives me pleasure to see that we share a number of ideas about markets, such as the 2% Rule, the concept of the market as a manifestation of human psychology, buying below value and selling above value, the market as a minus-sum game.

In the book you are about to read John Piper takes you beyond theory in a very useful Chart Tutorial. He invites you to follow him through a series of trades, commenting on his actions along the way. He provides an essential lesson that most beginners never get.

In The Way to Trade John Piper mentions that he has been managing money profitably for the past year and I know that he has been trading for many years before that. To get really serious money under management in the US requires a five year audited track record. I wish John success in continuing to make consistent profits and his readers a captivating and profitable journey into the financial markets.

Dr Alexander Elder

New York – Moscow, November 1998