This takeaway is about money management!
Dr. Alexander Elder points out that your priorities when constructing a money management system should be:
- Steady returns
- High returns
Survival always comes first, according to Alexander. That is, focus on preserving your capital before trying to get high returns.
When doing short-term trading, a rule to follow is to never risk more than a certain percentage of your account size! The awesome thing is that we have electronic tools available to ensure this happens automatically. If the trade doesn’t go in the direction you predicted, the system will take us out automatically, thus stopping our losses and preserving our equity!
Remember that you must only adjust this feature of stopping your losses in the direction you’re are betting on! That is, if the trend is not in your favour, do not adjust the order that is meant to preserve your capital, in such a way that you take on even more risk. That means you can risk losing a bigger amount of your equity.
The worst thing you can do is to think “this time is different”. Follow the rules!
Regarding learning a strategy, learning the rules and following them… This is super important. The best thing you can do to serve yourself is to be aware that
“Most traders take a good system and destroys it when they try to turn it into a perfect one”
Dr. Alexander Elder has taught us three pillars of trading and investing. Phycology, secondly market analysis and systems, and thirdly money management. He also shared how to keep our emotions in check. You might have to spend just as much time analysing yourself as you spend on analysing the markets.
Regarding indicators, remember that there is no such thing as one indicator to be used in all situations and for all kinds of purposes. Every indicator serves its own purpose, use them wisely, understand them and combine them.
The last key take-away from Dr. Alexander Elder in this series is practice proper money management. Preserving your capital should always be your highest priority.
If you don’t practice proper money management, you are a gambler, not an investor or trader.
I will allow myself to add some personal comments before we wrap up with Dr. Alexander Elder for now.
How do you ensure you have money to manage in your investing and trading system?
You need habits. And you could benefit greatly by having a money management system to control all of your finances. This can help you in setting aside a fixed amount or a fixed percentage on a daily, or at least on a monthly basis.
Taking an overall look at your habits can also help you with fast-tracking your success as an investor or trader. The more you can free up capital to save for investing and trading, the faster you can reach your goals of getting a bigger return and thus allow yourself more a little bit later.
How does this work? I am referring to compounding. The art that your money will grow exponentially by reinvesting your profits, and by adding in funds regularly.