Trading is not all about just stock picking, it is not just about a winning system. Yes, first you have to understand how to trade and put the odds in your favor of winning, but that is not enough. You must also add in risk management so when you lose several times in a row your trading career and account does not end there. You also must have faith in your system and method to be able to keep trading it even when you are losing, and you will have losing months, maybe even a losing year, can you keep trading through the tough times and stay around for the big wins?
One dimensional traders just pick stocks, if they are right they win for awhile, but eventually they do not stop out when they are wrong because they value their opinions over the stop loss and blow up their account. They also eventually get emotionally frustrated from wild equity swings and they eventually quit and blame the market.
Two dimensional traders have a good system and cut their losses but have trouble with self confidence and belief in their system. They tend to blame themselves when their accounts draw down 10% to 20% and have trouble understanding that it is just part of the game. The market environment is determining wins and losses not the trader, they don’t understand this. All they can do is take their entries and exits as they come and let the market do what it does. They have not separated themselves from their trading. Generally the two dimensional traders end up giving up due to not being able to handle the psychological ups and downs of trading real money during losing streaks.
The three dimensional trader takes entries and exits based on his methodology that he believes in, he manages risk per trade carefully and never loses more than 1% t0 2% of his capital on any one trade. The 3D trader’s self worth and confidence is not tied up in any one trade, or monthly performance he understands this is a long term process with ups and downs. Wins and losses do not change his mindset. It is just a business, stocks are just inventory, the market gives and the market takes away, and he just takes what it is giving.
“Successful trading depends on the 3M`s – 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