Having a written trading plan is one of the keys to success in trading.
But have you ever wondered why even the most well-thought-out trading plans fail?
Well, it's because writing down your trading plan is just the first step.
You cannot expect to write down a trading plan and have it magically make money for you.
There are some additional actions that you have to take to make a trading plan work well.
…and sometimes, you also have to know when it's time to throw everything out and start fresh.
So here are the five reasons why trading plans fail, how to tell if it is the right one for you and how you can make your current plan much more effective.
1. It Has Not Been Properly Tested
This is pretty common…
You buy a course and learn the trading method.
Great!
The strategy makes sense, so you write down the rules and immediately start trading it in your live trading account.
Not so great.
After trading it for a month, you lose 10% of your account and give up on the trading strategy.
This is how the Trading Silodrome starts (not a good thing).
You could have avoided this by testing your plan before trading real money.
Testing your trading plan does three things:
- It shows you if your strategy has positive expectancy or not.
- It gives you confidence to execute your plan.
- It shows you approximately what results you can expect.
To get started with testing you can read this post on backtesting.
Some trading strategies can only be forward tested and if that is the case, you can skip to this post on forward testing.
Writing down your trading plan is essential.
But once you have a plan, be sure to test it before you ever risk real money.
2. It Does Not Fit Your Personality and Lifestyle
Let's say that your t-shirt size is an extra large.
Would you wear a shirt that is a size extra small?
Of course not.
Well, at least not in public. What you do in the privacy of your own home is your own business.
My point is a trading plan that doesn't fit won't work, just like that t-shirt.
Yet, many traders insist on trading a trading strategy that does not fit their personality and/or lifestyle.
There are basically three elements to your Trading Personality…
If you do not take the time to figure these things out, then you could lose money with an otherwise great trading system. Or even worse, you could be trading a method that has almost zero chance of working for you.
Read those posts to learn more about how to figure out your Trading Personality.
3. The Plan is Incomplete
Are there holes in your trading plan? If there are situations that you are not prepared for, then you will probably run aground when you face these situations.
…like the ship above.
You may handle these situations correctly…or you may not.
But why leave that up to chance?
Some scenarios to consider are:
- How many losses in a row should you allow before you take a break and evaluate?
- Is there a situation where you may need to break certain rules?
- When should you not trade (during news events, holidays, certain days of the week, etc.)?
- How much correlation are you willing to have in your open trades?
It's not always possible to account for every single scenario. But do your best in the beginning and keep an eye out for new ones and add them to your plan.
Speaking of which…
4. It Does Not Evolve
Trading plans are meant to be a set of rules that you follow strictly, to make money over time.
At first glance, they seem like they should be written on marble tablets and displayed at the Louvre.
In other words, once they are written, they shouldn't be changed.
But in reality, you need to allow for a certain degree of flexibility in your plan.
Some trading plans work well on the first try.
Others need time to evolve.
Like a fine wine, your trading plan might be pretty good in the beginning, but can only reach its true potential with age.
There are several different reasons why a trading plan may need to evolve:
- It can become more optimized, such as improving the entry
- It may need to change with your life events (kids, retirement, new job, etc.)
- You may want to incorporate other trading concepts like pyramiding or scaling
- You want to simplify the process
- Market conditions change, so you need to tweak your strategy
When you are too rigid with your plan, you lock yourself into a paradigm that might not work in the future.
Yes, you need to have a written trading plan that works. But you must also be somewhat flexible.
Just be sure that the changes actually improve your results before you add them to your plan.
5. You Don't Turn it Into a Habit
Studies show that as much as 45% of our everyday behaviors are controlled by habits.
Think about that for a minute…
Almost half of things that you do during the day are a result of pre-programmed routines that have been set in the past…and not always by you.
Some of these habits have been consciously created, but most of them have not.
Many are the result of what we picked up as kids or young adults and are so deeply engrained that we do not think twice about them.
But therein lies the potential roadblocks to your success.
Habits can foil your trading plan in two ways:
- Existing bad habits can prevent you from doing what needs to be done
- Not forming good habits will not allow you to maximize your trading plan
If you are interested in learning how habits are formed and how to change them, I recommend reading this book. Overwriting bad habits and consciously creating new, productive habits will allow you to get the most out of your trading plan.
I would recommend journaling everything you do on a daily basis, for a week.
This will start to expose your bad habits and where you may have room to improve.
Final Thoughts on Why Trading Plans Fail
Having a written trading plan is essential to successful trading, especially if you are prone to acting impulsively.
But a trading plan alone will not make you a consistently profitable trader.
There is much more work that you have to do in order to leverage that trading plan into a consistent track record.
If you are having trouble finding consistently, even with a great trading plan, your trading plan may not be the culprit.
Look into trading psychology next.
