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Trading Plan Follow Up: Following the Plan

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

Last updated 11/2/2009 6:29 PM EST (GMT -5) 2 Comments

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Bradley W. Gareiss

Technical Analyst, GFT

Let's say you have made a detailed trading plan.  You know the exact criteria or "rules"  you will use to place a trade.  You have a checklist to make sure you follow each of these rules.  You have a money management strategy so you know how much you will risk on each trade, and you know what your risk:reward ratio must be.  You know what time of day you will trade, what time frames you want to look at, and what currency pairs you want to look at.  You have a spreadsheet ready to track each trade for further analysis.

The reality, is that this is the easy part.  To give an analogy, there are many people who could learn an NFL offense.  They could watch film, go to meetings, and learn which route each receiver will be running on each play.  However, there are only a handful of people in the world who can execute these plays with a blitzing linebacker bearing down on them in a game situation.  In other words, very few quarterbacks have the ability to execute.

Of course, the gap between learning plays and playing quarterback in the NFL is much larger than the gap between making a trading plan and following it.  But the point remains that if we can't execute the plan, then it doesn't matter how great the plan is.  It may seem easy to follow a trading plan, specifically if it incorporates all of the points I listed in the first paragraph.  For those of you who have traded with real money, you know that this is not the case.

There are many obstacles that prevent most traders that have an excellent trading plan from following it properly.  Almost all of these factors are psychological.  The other factors are problems such as the internet going out right before a trade.  Events like that are rare, and should be accounted for in the trading plan anyway.  These psychological roadblocks can take a serious toll on trading performance.  For those of you who have experience trading, I am sure you have had many moments where you wondered why you are not making as much money as you should be based on your trading plan.  The answer, of course, is that you are human, and humans have emotions.

There are three primary mistakes that derail even the best trading plan.  The first is taking a trade that is not part of the plan.  The second is not taking a trade that is part of the plan.  The third mistake is changing the rules of the trading plan based on a statistically insignificant event.

Taking a trade that is not part of the plan is extremely tempting.  There are any number of reasons that a trader would take a trade that is not part of the plan.  You could be having a losing streak and desperate for a win.  You could be having a winning streak and think they are invincible.  You could receive a tip that a large bank is buying Yen (keep in mind this tip could be from a bank trying to sell Yen and looking for suckers to buy their Yen).  You could see something that was part of an old strategy they heard about.  You could even straight up gamble just to get in the market.  All of these scenarios are dangerous.  If you lose, you feel miserable because you know you violated your rules and it cost you.  That can lead to even more psychological damage.  If you win the trade, that only encourages you to continue a behavior that will not be profitable in the long run.

Passing on a trade that is part of the plan is the second most common error.  This happens for a variety of reasons.  Maybe you have lost two and a row and are scared of taking another trade, only to see the trade you passed on become the big winner.  Or you have won three in a row and think the streak can't last forever.  Regardless of the cause, this is also very dangerous.  It is not uncommon for an emotional trader to pass on a trade that fit their rules and ends up winning, only to place a trade that doesn't conform to their rules and ends up losing.  These errors are why most traders do not maximize the results of their trading plan.

Changing your rules bases on a small sample size of trades might be the worst thing you can do.  Let's say you have placed 300 trades with your current rules.  Although you have had your ups and downs, this has been a profitable strategy.  Then let's say you lose 5 trades in a row, which can happen.  All of the sudden you change your time tested rules that have withstood hundreds of trades based on this sample size.  Overreacting to a small sample of trades can lead you go down a dangerous path.  If you change your rules to accommodate those 5 losers, you may wind up losing far more than if you stayed on course.  Naturally, it is wise to reevaluate your rules from time to time.  But do not make major changes based off of 5 trades.

Hopefully these examples will help you stay the course and follow your trading plan.  If you have ever asked yourself why you are not as profitable as your plan indicated you should be, check to see if one of these stories applies.  Better yet, learn from these examples and stay disciplined right from the start.

The information, including Commentary and Trade Ideas, provided on FX360.com should not be relied upon as a substitute for extensive independent research which should be performed before making your investment decisions. Global Forex Trading and FX360 .com is merely providing this information for your general information. The information and opinions presented do not take into account any particular individual’s investment objectives, financial situation, or needs. All investors should obtain advice based on their unique situation before making any investment decision and should tailor the trade size and leverage of their trading to their personal risk appetite. Any projections or views of the market provided by FX360.com may not prove to be accurate.

The views of the authors and analysts are not necessarily those of Global Forex Trading, its owners, officers, agents or other employees. FX360.com and the currency research team will not be responsible for any losses incurred on investments made by readers and clients as a result of any information contained on FX360.com. Global Forex Trading and the currency research team do not render investment, legal, accounting, tax, or other professional advice. If investment, legal, tax, or other expert assistance is required, the services of a competent professional should be sought.

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Comments (2)

fuji

November 02, 2009 at 10:58 PM ET

Great article, I do believe Trading is a long process even you have a sound Plan/Rule and good discipline right from the start. some how not every trade we take is going to sucess. We need to strive it to be perfection, because we are Trader, we need to trust ourself and have faith with our working Plan/Rule and be confident to take a trade on each set up and not over leverage, just keep everything as simple as is. like the NFL Coach used to say one play at a time stick in the game plan stay focus strive for a Touch Down.

esanariam

November 03, 2009 at 06:58 AM ET

Thank you! Great article, I share most of your articles with my friends. Very useful info, easy to understand.

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