By David R Jaymes When we talk about the Forex Traders Mindset we are talking about the mental/emotional dynamics or the psychology of Trading Forex. Let's begin with a few "rules of thumb". These "rules' support the mental habits needed to achieve the Traders Mindset. These rules have their beginnings in the world of manual trading.
"Manual" trading simply means that the trader initiates all trade entries and exits from his trading "platform" or "terminal". The advent of the personal computer has caused a phenomenal explosion in this type of "retail" trading.
In traditional technical analysis the Forex Trader closely examines technical indicators. Such indicators as candle sticks, trend lines, Bollinger bands, moving averages, stochastics, Fibonacci lines, etc. are used to make ones trading decisions. The number of indicators used and combination of indicators used is usually a matter of personal preference for most traders. The approach the Trader is using at the moment many times will determine which and how many indicators are used.
When I say "approach" I'm referring to whether the trader is "day trading", "hedging the market", "swing trading", "trend trading" etc. An explanation of the various types of trading "methods" or "approaches" to trading is a subject for another Special Report. I bring up these methods to illustrate the fact that many "indicators" and many "approaches" exist. The Forex Trader Mindset is the central key to success regardless of which "approach" or set of "indicators" one uses.
Before we get back into the "rules of thumb" let me say that one of the biggest attractions to trading Forex is the opportunity to earn handsome returns. Keep in mind that risk is the flip side of opportunity. In other words, the higher the profit potential - the higher the risk. Forex traders do everything in their power to manage their risk. Risk management is a topic for yet another Special Report but developing and maintaining the Traders Mindset is the first step to successful Forex Trading.
I also need to mention that good technical analysis skills are very important if one is to manual trade successfully.
Forex Traders also spend a great deal of time developing effective trading "methods" and "approaches". We see how that ties into the Traders Mindset in just a moment.
Back to our "Rules of Thumb"...
Rule number 1: Never trade Forex with your rent money (or any money you need for day to day living). In other words, only use money that you can afford to lose without affecting your lifestyle. It may sound pessimistic to be talking about losing your money but the reason this is important is you need to nurture a "sense of detachment". The more emotionally detached you are from the money that you are trading the better your judgment and the clearer will be your decision making. (It's the same reason why Doctors are discouraged from operating on family members- too much emotional involvement clouds the judgment) Never trade Forex with borrowed money.
This is a key concept and I cannot over emphasize the importance of developing and maintaining an emotional detachment from the money you are trading. It is common for emotions to run high when you are trading "live" and you you're your money in the trade. This is when it is very important to maintain your discipline and keep your judgment as clear as you possibly can.
Rule number 2: Think in terms of capturing PIP's rather than making money (whatever your native currency is be it dollars, pounds, euro's, etc.) Thinking in terms of PIP's allows you to distance yourself a bit from the money in your trading account. In addition, PIP's are the "universal Forex unit of measure" and as such can have different money equivalents depending on the lot size you are trading and your native currency.
If you get good at capturing PIP's then I guarantee that you can and will make money.
A word about discipline. You are likely to hear the word "discipline" used quite a lot in connection with Forex Trading. Perhaps the slogan "Plan Your Trade and Trade your Plan" best summarizes the practical side of discipline. To me, the real heart of the matter when it comes to discipline is the ability to do want is needed to be done at the moment rather than what may "feel" good to do at the moment.
Socrates once said: "The Key to living is always learning how to live." Applying this to trading, we can say, "The key to trading is always learning how to be a better trader."
Obviously having a trading method that you have confidence in is vitally important to "Trading Your Plan" but beyond that one needs to resist the urge to do what "feels" good during your trading session.
There is an old adage that summarizes the mental side of discipline: "First conquer yourself and the world will be yours." In other words, discipline and self-control enable you to more easily and consistently reach your Forex trading goals (and goals in your life in general).
A word about goal setting. Try picturing yourself already having achieved your goal. Conjure up the feeling you have had in the past when you achieve a goal. Feel the satisfaction and happiness of having achieved your goal. Now project yourself from that place of achievement back to where you are now and along the way back to where you are picture each step needed to get to your place of achievement. Write these steps down. Make an action list from these steps. These steps are your "bridge" that will take you from where you are to where you want to be.
Now just do it... take action and complete the steps that you have listed. Give yourself a "pat on the back" as you complete each step and keep moving toward your goal. It's not the pace of your movement that is most important but rather the direction of your movement. Think like a tortoise: "slow and steady wins the race." Keep on keeping on. Be like a postage stamp: "Stick to it until you arrive at your destination." Before you know it you will arrive at your goal (and soon it will be time to set a new goal).
Rule number 3: Make changes to your method between trading sessions (using your demo account) not during them. It is sometimes a real challenge to let your method "play itself out" when you are trading live and this is where discipline comes in. Discipline requires that you "Plan your trade and trade your plan". Avoid the mistake of trying to "Plan" during your trading session. Emotions usually run quite a bit higher during live trading and this can impair your judgment. Don't make the mistake of devolving into "knee jerk" reactions during your live trading.
Let me emphasize the value of using your demo account. Your demo account is where you can test out your strategies and trading methods. This includes methods that you acquire from others as well as those you develop on your own. Make liberal use of your demo account. Get comfortable with your trading method before you trade "live" with it. If you know what your method can and cannot do then it is far easier to "hang in there" during live trading. You will need to learn to trust your method during the "heat of battle" of live trading. This is why it is so important to work out your method(s) in demo testing before going "live".
Rule number 4: Stay as calm and "centered" as you possibly can during your live trading. If you are doing a succession of trades such as day trading for example, take a moment to compose when you sense the need. Stop and take three full breaths (inhale fully, then exhale fully - do this three times in a row). Get in the habit of doing this at the conclusion of each trade. This is important whether your last trader was a gainer or loser. If it was a loser then you need to "shake off the sting" and regroup for your next trade. If your last trade was a gainer, you need to come down a bit off of your "traders high" and get ready for your next trade. The bottom line is: you need to posses your emotions not the other way around. Traders that have come to grips with this Rule have found themselves much closer to achieving their Forex trading goals.
Rule number 5: No one ever went broke earning a profit. A profit is a profit no matter how small. Learn to deal with a variety of market conditions before you try to go after the "big ones". You know, the "big ones": the big movements in price that crash through support or resistance into huge returns. Work your way up to the "big ones" if you wish. But, keep in mind that slow and steady can win the race.
You don't have to capture huge percentage gains in order to survive in the Forex Market. Consistent small gains can really add up over time. If you earn just 1.8% a day after 1 year you will have increased your account 103 times! In other words, if you begin trading with a $500 account earning 1.8% a day, after just one year you would have $51,500. This is the slow and steady power of compounding.
Combine the power of compounding with The Traders Mindset and you are well on your way to winning in the Forex Market - the largest market in the world.
Copyright © 2008 http://www.4x-rox.com All Rights Reserved.
Permission is granted to distribute this article so long as it is done so in its entirety. David R. Jaymes is a Writer and Forex Trader. He graduated from the University of Maryland, USA with a degree in Agricultural and International Economics. He has prepared a Special Free Report that shows you how easy it is for you to use the exact techniques used by today's most successful traders. To get your Free Report, head on over to: http://www.4x-rox.com |
