Incorporating Soft Elements Into Your Forex Trading Strategy

By: Andrew Shiveley
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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