Developing a Forex Trading Plan – Part 3

With all this talk of sticking rigidly to a plan, you might be asking whether there are still potential benefits to deviating from your plan. After all, if you change the rules for one trade, and it comes off, where is the harm?

You might be unsurprised to learn that it is exactly this kind of mindset that we are trying to avoid with regards to the trading plan idea. After all, while you might get some pleasure in the short-term from throwing your trading plan out of the window, when you repeat this pattern of behaviour across multiple trades, you will begin to see the folly in it.

Furthermore, any deviation from the plan will have a negative impact on your ability to maintain discipline over the long haul. If, for example, you stopped following your trading plan and made a profit, you would be rewarded for lacking discipline, and you could end up thinking that it’s no big deal to abandon the trading plan.

Being rewarded for abandoning your plan will decrease your inclination to follow the plan in the future, which either means that your plan was flawed to begin with, or that you were just plain lucky. If there is a genuine problem with your plan, then by all means adjust it, but if there isn’t, then you have been rewarded for pushing your luck, and pushing your luck is not something that you want to make a habit of as a trader.

Therefore, we need to be able to distinguish justified wins from unjustified wins. A justified win is when you create a very detailed trading plan and follow it to the letter. Any win that results from following a plan is justified, and helps to reinforce trading discipline.

On the other hand. an unjustified win happens when you either don’t have a plan, or you make a plan and don’t follow it. While you might yet be rewarded, you should know deep down that the win occurred as a result of chance rather than planning. This brings your trading down to the level of a roulette player, or someone who is throwing darts at a printout of the S&P 500 – you have won through sheer luck rather than by working out all the angles.

Maintaining discipline is vital for consistent and profitable trading. Trading is a matter of getting the law of averages to work in your favour. You trade proven forex trading strategies, over and over, so that over a series of trades, the strategies work enough to produce an overall profit. It’s a bit like developing a golf swing – It’s all about taking shot after shot, and the more consistently you can pull off the swing, the better your performance will be. If you take a structured approach with every trade, you will become better at executing the plan, and this will reveal the efficacy of your trading plan one way or the other.

Basically, the point of a trading plan is to give the law of averages a chance to work in your favour, so that you will make an overall profit across several trades. The probabilities are thrown off when you abandon the plan, and this is likely to lead to losses in the long term.

Discipline brings profitability, and you should never let unjustified wins get in the way of your ability to maintain discipline. By following your own trading plan, and getting into your head that the more you follow the plan (if it is indeed a good one) the bigger your profits will be in the long run, you can set yourself up for success as a trader.

Now that we’ve established how important it is to have a trading plan – and stick to it – we’re going to be looking at how to go about devising a successful plan in the coming instalments.

Other articles in this series:

Developing a Forex Trading Plan – Part 1

Developing a Forex Trading Plan – Part 2