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Why Do Trading Plans Fail? Here Are 5 Main Reasons

Even a well-constructed trading plan can fail. Here are five primary reasons why your trading plan might not yield profits, based on insights from Hugh Kimura of Trading Heroes:

1. The Trading Plan Hasn't Been Properly Tested

Case: A trader buys a book of trading plans from an expert and applies it immediately, but loses up to 10% in a month.

Solution:

  • Backtesting: Test your trading plan first to understand its success potential. Ensure your trading plan meets the following criteria:
    • Demonstrates potential from the current strategy.
    • Increases confidence during trading.
    • Shows profit potential through a pre-set Risk Reward Ratio.

2. Not Aligned with Your Personality

Case: A good trading plan that doesn’t match your trading style will be difficult to implement effectively.

Solution:

  • Know Your Trading Type: Understand yourself and choose a strategy that fits. Types of traders in the forex market include:
    • Scalper: Trades on very small time frames (1M to 5M), targeting small but frequent profits.
    • Day Trader: Trades daily with profit targets within the same day.
    • Position Trader: Holds positions long-term.
    • Swing Trader: Holds positions from several days to weeks.

3. Not Well-Organized

Case: A trading plan that is haphazardly organized without clear steps.

Solution:

  • Create a Practical, Realistic, and Effective Plan:
    • Write out the steps in your trading process.
    • Include both short-term and long-term plans.
    • Define risk tolerance limits, when to "break the rules," and when to take a "holiday" from the forex market.

4. Not Flexible and Not Developed

Case: A trading plan that is too rigid and doesn’t evolve with changing market conditions.

Solution:

  • Be Flexible: Adapt your plan to dynamic market conditions.
    • Example: If the initial plan sets a Stop Loss (SL) at 10 pips and a Take Profit (TP) at 20 pips, but market conditions change, don't hesitate to adjust SL or TP based on technical analysis.
  • Upgrade Your Plan: Ensure your plan evolves with market changes.

5. Not Made a Habit

Case: Not making it a habit to write down the trading plan and note the difficulties encountered during trading.

Solution:

  • Maintain a Trading Journal:
    • Record all trading results based on your plan.
    • Basic elements to note: entry and exit times, pairs traded, and details of trading activities.
    • Benefits: Compare your current trading performance with past performance, learn from experience, and avoid repeating the same mistakes.

A trading plan is designed to guide your trading activities in a more structured manner. However, if it fails to generate profits, investigate the reasons. Perhaps the plan hasn't been properly tested, doesn't suit your personality, is not well-detailed, or isn't flexible enough to apply. Even the failure might stem from your own reluctance to document the plan in a journal regularly. Make the necessary improvements to ensure that profit is not just a dream.

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