To veteran forex traders, the term 'strategy' is often
synonymous with 'trading tools,' meaning any combination of
charts, indicators, and oscillators that will help them to
make judgment calls on their trading decisions.
Though when you are caught up in trading, it is very easy
to become so focused on the technical aspect and trying to
gain an edge with the latest indicator that you forget to
focus on the mental aspect of trading. In a sense, a trader
will fall into the trap of putting to much of their focus
outside of themselves and will actually forget that *they*
are the ones making all of the choices and decisions.
This mental aspect of forex trading incorporates what we
call the 'soft elements' of a forex trading strategy, and
the two main parts to focus on are psychology and money
management. This is as opposed to the 'hard elements' of
your trading strategy, which would be the type of charts,
indicators, and oscillators you are using that make up the
technical portion of your trading strategy.
Money management and trading psychology are inextricably
related, and one cannot be successful without the other.
Trading psychology mainly encompasses focusing on your
emotions while you are trading and making sure that
emotions such as fear or greed do not make you deviate from
the rules of your trading strategy.
You will feel all kinds of different emotions during your
forex trading (it can be rather like an emotional roller
coaster), but the two emotions that can be the most
devastating are fear and greed. Trading psychology means
that you learn to tame these emotions as they pop up, and
coming to terms with the fact that dealing with large sums
of money can be a very emotional experience.
Money management is an offshoot of forex trading
psychology, but it is probably the most important soft or
mental element of your strategy. A simple definition of
money management would be 'acting in such a way to maximize
gains and minimize losses.' One of the most important rules
of proper money management is to always trade with the same
number of lots every time you receive a buy or sell signal.
Another rule is to never forget to enter a stop loss order,
and always go for the same profit/loss ratio. A common
proportion that many forex traders follow is 1.5/1 or 2/1,
meaning that they will always enter a trade hoping to get
1.5 or 2 times the amount of pips that they are willing to
risk (and this usually includes the spread).
As you should see, money management can be difficult or
even impossible to implement if you ignore trading
psychology, because you must already have emotional
stability if you are going to focus on maximizing gains and
minimizing losses. If you get fearful every time the market
turns against you and rush to exit the trade before it has
time to turn around in your favor, you will short circuit
the power of your trading strategy.
If you ignore the soft elements of your forex trading
strategy, it really doesn't matter how powerful your
combination or indicators and oscillators is because you
will always fall short when it comes to making an emotional
judgment call.
There is no quick fix to creating a profitable forex
trading strategy; including all of the essential technical
and mental aspects is the key to success.
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http://TheCurrencyMarkets.com
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