As a trader following your trading plan with consistency and strict adherence requires high level of discipline and focus. It is a fact that a trading plan is not created overnight and is done by testing and applying various strategies over a period of time. Certain currency pairs do move in trends and are known to have cyclical characteristics. An organised forex trader will normally have his trades and analysis planned out on a weekly basis before the market opens, ready to execute or place a resting orders. As a minimum requirement of any trading plan, a trade should have an entry position and an exit position. It is imminent that a high level of focus is required to follow through your trading plan.
Having in depth knowledge on this subject here are the top four items that tempt traders to abandon their trading plan. Please be aware of these temptations and always bear in your mind.
Being Overconfident or having lack of confidence
"Hot hand Fallacy" notion states in the event where a person experiences success after success in random events, they are more likely to have continued success. This term is often referred to the sport of basketball when a player makes a string of 3 point shots where the probability of him making continued 3-pointer shots are very high.
This can be related to trading where in most circumstances our emotions take over us and you can feel an air of invincibility. Overconfidence is a trap and recipe for making bad trading decisions. Should this happen to you, never get so overconfident that you ditch your trading plan. Overconfidence leads to a number of problems one being that you overleverage and increasing your risk exposure on a trade after successful run. This causes you to incur a loss that wipes profits you earned on your previous trades. This is known to be detrimental and potentially leads to blowing one’s account by revenge trading trying recover that big loss. Overconfidence can make you take invalid trade set-ups entering a trade with no definition of strategy that is outlined in your trading plan i.e. placing a trade for sake of it.
Likewise, having a lack of confidence as a result of back-to-back losing trades can lead you to abandon your trading plan. Lack of confidence in your trading can exhibit lack of belief in your trading strategy meaning getting out of a profitable trade earlier than you should because you are afraid of losing profits. This in turn means, having the mentality that “something is better than nothing” mentality. This not the mentality you should possess, as following a trading plan is integral to whether you see consistent profits. It is easier said than done, but the trick is to be able to cope and stay composed with both a series of back- to-back profitable trades or back-to-back losing trades and not let emotions take over.
Mental and Physical fatigue
There are many factors that can lead mental and physical lethargies. Whatever your external situations maybe e.g. common being stress, debt, family issues etc. it can affect your trading. Trading the markets requires a high level of sharpness and accuracy as execution is everything. A HFT (algorithmic trader) needs react to markets by the second and so reaction and processing information is absolutely everything. ‘Losing your edge’ or slower reaction time would literally have adverse effects.
It is advised as much as you need time studying charts and price action etc. you also need time off from the charts. In fact, Intra-day, Swing and Long term trading do not require you to look at the screen for long periods of time. If you have placed trades with a stop-loss and take profit, then let the markets do its magic. Allocate time for vacation or give time away from the markets. It’s true there are always opportunity in the markets but a well-rested trader always has the edge over one that is mentally and physically fatigue.
Waiting for trade setups- Boredom
Okay! so your now doing technical analysis, Fundamental analysis or both before the markets and dependant on your trading plan you may not have any trade setups for the coming week. What do you do? The correct decision is to sit back but many traders get sucked in deviating away from their trade plan. Many traders have reacted to boredom by forcing trades just to feel engaged with the market. If you find yourself tempted whilst being bored, create the discipline to walk away and leave the charts.
Lacking focus- Too many Distractions
Too much distractions causes a lack of focus which ultimately spells harmful. Reading and analysing the charts require focus as error or judgment could alter your bias to trade setups. I’ve seen schoolboy errors such as a trader going long (buying) on a major resistance level, his analysis was correct but faulted on his execution. The individual was looking at the wrong chart and hastily placed his trades. After hour he realised that his trade was going the opposite direction and was down hundreds of PIPs. OUCH! Verdict: Found out he was multi-tasking with other duties and was not focused on his main priority. Let me make it clear, trading is not a Game! It requires 100% of your devotion and focus if you want to success.