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6 Simple Reasons Most Trading Plans Fail (Experts Guide): Are you beginning your trading journey? Of course, the first step is to make plans for trading. But sometimes despite having well-made plans, you might not receive anticipated results. Sometimes they could even end up being downright failures. But why does this happen? The rate of failure in trading is very high. You can’t expect to make a trade plan and expect it to generate profits magically. There are too many variables in play when it comes to trading. A plan alone will not be able to ensure your success. There is much more work to be done to gain consistent profits from the trading plan you made.
6 Simple Reasons Most Trading Plans Fail (Experts Guide)
The first step towards not becoming a part of the statistics of failed traders is to understand the majority of traders fail and to avoid the mistakes they make if they are preventable. Six simple reasons that most trading plans fail are discussed in this article to help you be warned about them and avoid them to the possible extent.
The Plan Was Not Tested Properly Before Going Live
Did you learn a new strategy make a trading plan and go to the trade directly? Always test the plan before risking real money. Backtesting is essential if you are an automated or even a manual trader. Doing back-testing will help you analyse the potential returns this plan might bring. It will also provide you with a database to compare to your real-time results. Once you have positive results during the backtesting, it is time to do beta testing also known as forward testing. This is because there can be differences in the circumstances of the real trading and backtesting can be different. Forward testing will help you uncover the blind spots that might have been there at the time of backtesting. The probability of your plan failing is very low if you have tested it in both backtesting and beta testing.
Not Reviewing Trade Metrics in Detail
You are in for a series of failures in trading if you don’t keep serious trading journals and work diligently on them. A trading journal is a huge help to identify areas where you might be at fault. It doesn’t have to be complicated. A simple spreadsheet is more than enough. But you have to keep the metrics obtained during the backtesting, beta testing as well as live trading results. If you want your trading journal to be more comprehensive, then you have to find the tools to compile them.
Your Trading Plan Does Not Suit Your Personality or Lifestyle
Three important factors are in your trading personality. They are:
- Timeframe: This refers to your daily schedule and attention span.
- Trading Setups Category: If you like technical trading and fundamental trading.
- Risk Tolerance: This is the risk per trade you are comfortable with.
You have to think about these deeply and figure out the details. If you don’t do so then you will lose money even if you are working with a great trading plan. There are chances that the trading plan that you are using is incompatible with your trading personality.
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The Plan is Not Complete
Having blind spots and gaps in your trading plans may end up as a great obstacle while trading. Being not prepared with an alternative plan for all possible adversities can end up in a bad situation. The whole of your planning might be thrown off the course if you face a situation that you are not prepared for. You can spontaneously come up with a solution for the situation you are encountering. But there are chances that you might not be able to do so. The important factor you have to take note of here is not to let anything like this surprise you. Why should we leave such things to chance? Think of all the possible scenarios where things can go wrong and be prepared with a plan to face it in the time of planning itself. You can take the following points as examples:
- How many consecutive losses can you take?
- Will situations that may require you to go off the rules set in your plan arise?
- Are there any times that you should avoid trading completely?
- What degree of correlation are you willing to allow in your open trades?
It is not always probable to account for all conceivable outcomes. Nevertheless, start strong, keep an eye out for new ones, and incorporate them into your strategy.
You do not Learn, Grow or Evolve
Making a trading plan and executing it with consistency is the key to success in trading. This is what beginners learn everywhere. But from a practical point of view, a certain level of flexibility should be there for your plans. Sometimes a plan may work on the first try. But certain others have to undergo a series of modifications from time to time to attain success. If you consider your plan to be unchangeable then you are sticking to a strategy that does not work in the future or earn profits. You should monitor your financial health regularly and change your plans if you are getting less than what is estimated.
But make sure that it does not lead to analysis paralysis, where too much information coming to you at once makes your decision-making skills freeze up. Don’t overanalyse a situation in such a way that you will become incapable of making a decision. Various reasons may require a plan to evolve. Some of them are listed below.
- You can optimise the plan to a greater extent if you feel like it.
- One may have changes in life circumstances like marriage, the birth of a child or retirement.
- You can incorporate trading ideas such as pyramiding, scaling etc.
- There might arise a situation where you might want to have a simpler trading process.
- And of course, the ever-changing market. If you don’t adapt your plans to accommodate the fluctuations that are happening in the market, they might fail.
Besides this, you also should learn new skills, strategies etc and grow and evolve as a trader as time passes. Don’t think that it is okay to stop learning just because you have started to make consistent profits. You have to keep up with the latest technical and financial know-how of the industry to continue being successful. Did you hear of the new stock trading online course offered by the Entri App? The Entri stock market course provides access to unique live sessions, live mentorship support, post-market sessions, practical trading assistance, course certification, and an understanding of forex, intraday, swing, and options trading in addition to well-known trading methods.
Lack of Importance Given to Trade Psychology
Paying their entire focus on trading strategy and ignoring trading psychology is a critical mistake made by novice traders. This will eventually lead to their downfall. Some key points to take note of are listed below.
- Trading is not an easy career. It comes with lots of drawdowns. Tenacity is an essential quality you need to succeed in trading. You have to overcome the failures, learn more and come back stronger. You should have the willpower to get up from each attack made on you by the world.
- Discipline is also an essential quality that a trader needs. You have to develop trading as a habit. Traders who stick to their plans are far more likely to be consistently profitable than those who trade using the SWAG strategy. Put your trading strategy in writing first. Next, monitor your outcomes to see if you are adhering to the plan. And if you are not then do make sure that this evolution or modification is beneficial.
- Always stay humble. Arrogance and overconfidence offer you no favours when it comes to the trading sector. Don’t let a winning streak get into your head. One might think that their ideas are infallible when they have few wins. But it is essential to admit our mistake and exit with small losses instead of trying to prove a point or ease your ego by not exiting a losing trade. So, keep in mind that a lack of humility and overconfidence will result in overtrading as well as blown-out accounts.
- Patience is a virtue when it comes to trading. People may enter or exit trades too soon due to their impatience. This might result in losing big opportunities and hence in big losses.
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Frequently Asked Questions
1: What is a stock?
Why is technical analysis not always reliable?
Technical analysis is a great tool for traders, but it should not be relied on completely. The reason for this is that technical analysis ignores basic elements like economic news and data, political developments, and market sentiment in Favor of merely considering historical market data and trends.
What are some other Simple Reasons That most Trading Plans Fail that are not mentioned in the blog?
- Poor Risk Management while trading.
- Learning new strategies and enacting each of them one after another without giving one a gap to work and succeed.
- When emotions like fear or greed are connected to trading, it can cloud judgment and lead to poor choices. Traders who are too connected to their positions or trades are often reluctant to abandon losing positions or profit from well-thought-out trades.
- Never set unrealistic expectations. Being over-ambitious and trying to earn big in small time might result in aggressive as well as bad decisions which in turn might result in losses. Setting too big expectations often encourages people to ignore the risks involved. And this put them in danger of financial losses.
