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Five Golden Rules of Trading From Alexander Elder

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5-золотых-правил-торговли-от-Александра-Эльдера You can find more information on trading rules by Elder from his book «How to Play and Win at the Stock Exchange» and «Trading With Dr. Elder: Encyclopedia of Speculation,» while today we are going to introduce you to the best five of them. 1. Let’s call it the Rule of 3 Ms: Method, Mentality, Money. Elder is confident that trading success is based on the following three foundations:
  • Mentality, method and Money.
  • Mentality: the psychology of the trader, market and its participants.
  • Method: market analysis methods and decision paths.
  • Money: Money Management and Risk Management.
Trading Psychology, or «M» one, was knowingly put by Elder in the first place. He believes that it is psychology that newbies overlook, applying maximum efforts to the creation and testing of a trading strategy that in real-trading circumstances begins to fail the trader because of his/her emotional immaturity or lack of readiness for work in the Forex market mode. For control over themselves and their emotions, Elder recommends that traders draw up trading plans before entering the market, never change them during trading and be sure to keep a diarydetailing their trades. Next, let’s look at the other two «Ms» representing Elder’s rules 2 and 3:
  • Three screens rule.
  • Two percent rule.
2. The rule of three screens Elder developed his own approach to the analysis of financial markets and decision-making based on a system of 3 screens. This system means that the market assessment is made at different times, using 3 screens (i.e. charts).
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While selecting a schedule for analysis using the triple screen system, Elder recommends using a factor of five, whereby each successive time frame is younger than the previous one. This way, if you work with a daily chart (and if it is your main chart), then you can set up a triple screen system by combining, in this case, the daily, weekly and intraday (e.g. 4-hour) charts. This system should be applied as follows:
  • First , on the weekly chart, trace the history of the asset: by how much the trading tool is undervalued or overvalued, what the dynamics of its movements is and whether there are sufficient grounds for opening a trade based on it;
  • Second, use the daily chart for the execution of strategic decisions that have been taken on the weekly chart (where to put Stop Loss);
  • Third, use the 4-hour chart to accurately determine the time of opening a position.
In other words, the main thing that you need to do while using the triple screen system in your work is to choose the right and comfortable time frame and then enter an older frame and use the data obtained to identify the place for entry into/exit out of a trade. 3. The 2% Rule Proper money management is as important as the understanding of psychology and of oneself and is no less important than the ability to carry out market analysis. Control over risk is carried out using the 2% rule:

In each of your trades, you should not put at risk more than 2% of your deposit. At the beginning, it is necessary to identify the price of position opening and the level of Stop Loss. By defining these values for your trade, you will have easier time calculating the lot size, risk level and how many pips in the trade interest you.

4. The 6% Rule To fully control your trading account Elder advises that you stick with the 6% rule, whereby you avoid risking more than 6% of your trading account. For instance, if the deposit is 100 thousand dollars, and the risk for each transaction is no more than a thousand, you are entitled to keep open no more than 6 trades. Thus, in the case of 2 losing trades, if you lose two percent out of the 6 allowed, then this month you can afford no more than 4 open positions. This rule does not limit your ability to build up positions in the event of successful trading but rather is designed to protect your capital in the case of a string of losses.
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In order to follow the 6% rule, you need to stay disciplined and focused. Before you start trading, you need to determine the risk margin on your account and only then estimate and control your risks under the 2% rule. 5. The «5 Bullets in a Clip» Rule In choosing technical analysis tools, Elder recommends choosing five indicators at most. Elder explains this by the fact that the calculation of all the indicators is based on the opening/closing price, trading volume, as well as the max and min prices. This says that if you use the above rules correctly and use a serious approach to the issue of trading in general, you will not have to use more than five indicators. This rule derives its name from the size of a rifle clip. The five bullets used by Elder himself are 2 exponential moving averages, the MACD lines and histogram, envelope and the strength index.

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