Forex Trading – Stick to the Plan or Not!

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Wednesday, 21 January 2009 11:03

Forex trading requires a lot of thinking and planning and whether you like it or not, the success in forex depends on psychological strength of the trader. In fact it is widely believed that most traders that fail, trade without a plan. Having a plan isn’t quite enough; you have to religiously follow it. However, in most cases, every one of us tends to break the rules. It made me wonder, are there any specific physiological reasons why forex traders sometimes skip their own strategic plans and how does this misbehavior affect the profits?

One of the reasons is obviously greed. Even with a specific outlines of what not to do during forex trade, witnessing a profitable trade triggers the overwhelming greed for more. Thrive to become the next millionaire clouds the trader’s mind and logic. In hopes for a big win the trading rules are set aside and forex trader, covered head to toe with illusions, loses the necessary focus.

Apart from the desire for the pursuit of more money, another physiological effect takes place – fear. The fear substantially reduces the self-esteem and therefore prevents traders from opening a trading position when needed. Fear can strike in two forms – fear of losing what you already have in your hands and fear of letting a good opportunity pass by without you.

Breaking your own trading rules is caused by emotions and the lack of discipline and patience. The worst case scenario of ignoring your plan includes chasing the market, not willing to quit after a series of losses, irrationally changing your stop/loss levels, overtrading without shame, risking way beyond what you can afford and, we all know the feeling(!), revenge trading in hopes to make up for past losses.

What if breaking the trading plan is caused by an imperfection of the strategy? After all forex market is manipulated by many factors and tends to “mutate” from one form to another. Forex trader needs to adjust the plan and adopt the current market changes. Not being open to changes most probably will lead to a complete bankruptcy.

Keep in mind, though that making changes should not set your trading plans on fire! The good plan should be detailed enough to include the possible forex market changes in order to catch the profits. The boundaries of your strategy plan should include very strict money management no matter what.

Below is couple of ideas to consider when building a trading plan:

1. Style. In order to achieve more or less complete trading plan, you have to figure out your trading style and build the plan around it. Finding out what style suits you best includes detailed understanding about different approaches and market movements.

2. Mental Preparation. Clear and objective thinking is almost the most important factor in forex trading. Your emotional state, good habit and clarity of thought all influence the trading outcome on the daily basis.

3. Checklist. Forex trading requires a lot of discipline. The trading plan should definitely include the daily checklist for the trading activities. Preparation for every new trading day is essential for your success.