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The Importance Of Trusting Your Trading Plan

The Importance Of Trusting Your Trading Plan

Tyler Yell, CMT, Currency Strategist


Article Summary: Irrationality has a lot to do with fear. The thing most often feared when trading is the loss of money or being proven wrong on an individual trade. Because you can only limit but never eliminate the chance of loss, you need to find a way to emotionally own the loss before the trade starts so you can trade free of fear and focus on the big picture of your strategies objectives.

As traders, we know that trading is one of the best ways to earn a buck, a euro, or a pound but it can also be the toughest as we’re getting started. The reason for this difficulty usually has to do with the emotional conflict and the uncertainty of any one trade. However, there are a few things you can do to gain the edge that successful traders have by trusting your trade regardless of the individual outcome.

Learn Forex: Trust The Overall Trend and Not Your Latest Trade

A Narrow View Often Harms Our Trading So Think Big Picture

Traders often look at the trade at hand and magnify its importance to the overall trend and neglect the overall trend. A main reason for irrationality is due to projecting the importance of the most recent trade and not the overall market environment which would often serve them better. Frequently, the traders curse is looking back on the chart and seeing clear trades that they didn’t take in real time which is often a waste of emotions and thoughts.

A broader view can be accepted by indictors like the Ichimoku cloud or moving averages and taking trades only in the direction of the trend. Taking the large view helps you accept the fact that you may only catch 30 -50 percent of the trade in the end and you may place losing trades while trading in the direction of the trend. But more importantly, taking the larger view can help you managing your risk and can eliminate overly strong reactions if you place a few losing trades while following a trend.

To borrow from one of history’s most famous trend followers, here is a quote from the eternal Reminiscences of a Stock Operator by Edwin Lefèvre

I think it was a long step forward in my trading education when I realized at last that when old Mr. Partridge kept on telling other customers, “Well, you know this is a bull market!” he really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.

The market does not beat them. [Traders] beat themselves, because though they have brains they cannot sit tight. [Mr. Partridge] was dead right in doing and saying what he did. He had not only the courage of his convictions but also the intelligence and patience to sit tight.

Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations. In a bull market the game is to buy and hold until you believe the bull market is near its end. “

Accept the Loss Mentally Up Front to Eliminate the Fear

This is an odd recommendation upon first introduction but a helpful one. The reason this can be so helpful is that one of the toughest things for a new or unsuccessful trader to do is close out or exit a losing trade which often results in a larger loss than the original amount they were trying to avoid booking to their account. If you find the amount you are comfortable risking on the trade when seeking a profit and can accept the loss upfront even though you still plan on the trade being profitable, you can stay even minded on not be negatively affected when one or two trade close out at a loss.

Learn Forex: If the trade doesn’t work out, that’s OK. Keep calm and carry on.

A favorite method by many successful traders to avoid being shocked or emotionally derailed by a losing trade is to trade reasonably small .

Trade Your Plan as It Is But Keep on Improving Too

Lastly, to increase the trust in your own trades, practice mental restraint by understanding any market activity that doesn’t fit into your trading plan is for someone else to trade but not you. Mental restraint helps you to trade your plan alone and not chase moves outside of your trading plan. After your trading is done, you can review your trades so that you can also keep improving your plan without harming the current trade you’re in.

Closing Thoughts

Viewing markets via the big picture and pushing aside the negative emotions of individual trade outcomes can help you to make progress without emotional conflict. That is because you’re focusing on the big picture while managing risk and not validating yourself as a trader on individual trades which you have no control over. By trusting your trade, you allow the trade to play out as your trading plan says it should and you continue to improve yourself and your strategy.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.