Common Trading Mistakes: Failing to Obey Your Original Trading Plan
One of the biggest trading mistakes is something that all traders have done at some point in their career. That is, setting up a trading plan and then failing to obey all of its requirements. While many beginner traders will take this even further (and not even have a plan in mind before trades are placed), more experienced traders will generally start with a plan and then alter that plan if markets move in unanticipated ways.
“The problem here is that if you feel the need to change your plan mid-way,” said Haris Constantinou, currency analyst at TeleTrade, “there is a good chance that the trade was inaccurate in the first place and that another trading idea should be found.” This means looking for an entirely new trade rather than implementing the old one. What many traders fail to realize is that they made the plan for specific reasons in the first place, and that any need to change the trade down the line will invalidate the original rationale that got the trader into the position initially.
Hypothetical Examples
An example of failing to match your original trading plan can be seen in situations like moving your stop loss level once prices have started to move in an unanticipated direction. Many traders will do this because they are afraid of this level being hit and losses being seen. But what these traders are forgetting is that this stop level was chosen for a reason and moving it to a larger distance away from the original entry can have a drastically negative effect on risk to reward ratios.
Let’s use another hypothetical example here. Let’s assume that your original profit target for a trade is to achieve a gain of 100 pips. Using conventional trade planning, the trade uses a risk to reward ratio of 2:1. This would mean that the stop loss for the trade would be set 50 pips away from the entry level. But if prices start to approach this level, and we move the stop loss to 80 pips away from the original entry, the 2:1 ratio is no longer in existence. While this might not seem like a major problem in the short term, consistently changing trades like this can have a major impact on long term profitability prospects.
Most successful traders use money management ratios of 2:1 or 3:1 so any changes to these figures can put your account value at risk, as you will need to win in a larger number of trades in order to make gains. Since there is nothing in the strategy that accounts for this (simply moving a stop loss will not improve your winning percentage), the overall impact of this type of behavior is that losses are increase while gains are limited.
