The Problem of Trying to Outwit Your Trading Plan

One of the greatest problems most traders face can be summarized as “Not following their trading plan or strategy.” As humans beings we have several tendencies which cause this. One of the main culprits is that once we have a plan that works (or at least was shown to work in the past), we try to make it better by guessing which signals will be profitable and which will be losers (because even good trading systems have losing trades). The result is frustration, because our actual trading results end up varying greatly from what the system should be producing. Understanding why this occurs, and more importantly how to change it, is a giant step in becoming a consistently profitable trader.

Outwitting Your System

Once you’ve created a trading plan or strategy–or found one in a book or from another trader–that you like, you’ll want to test it. Through testing it on historical data you find that it was profitable, and would have resulted in a nice weekly or monthly income. You can see that while there were likely more winners than losers, there were still quite a few losing trades over the time frame tested.

In your mind you tell yourself that overall it was profitable, and losing trades happen. Happy with your strategy you open a real money account and proceed to trade. But something weird happens.

In real-time you notice a lot of new information–setups maybe don’t look exactly like they did in simulation or like they did in the past, and so instead of trusting the signal and just taking the trade, you start trying to guess which signals will result in a  profit and which will result in a loss.

You have a “great feeling” about a signal, but the price blows through you triggering your stop and resulting in a loss.  You have a “bad feeling” about the next trade (and you just lost the one prior, which looked so good!) and so you skip it, only to watch in frustration as it moves in your favor and would have been profitable. Or, you lose three or four trades in a row, and decide not to trade the next day…a day which could have made back all your money and more.

By deviating in this way, a profitable system becomes a completely untested system. While you may have put in the work to test the system, by not instituting it correctly you are not becoming a better trader. Your results are now random, and no longer based on research. In essence you are gambling, because you are no longer trading with the same strategy you tested. By skipping signals, you drastically change the results.

If you want to filter signals, define how you will do it, and then test the system again.

Why We Try to Outwit Our Trading Plan

There are several reasons why we try to outwit our trading systems. One is that in real-time there are likely to be external biases which affect our trading. This may be the opinion of others, articles we read or the news we watch. Typically, don’t listen other’s opinions while trading, it’s a bad idea.

Also, knowledge is very different than application. Most of us know that daily exercise will make us feel better, but until we actually do it the knowledge alone doesn’t get us in shape. The paradox is that we need to perfectly institute a trading plan in the market to learn how to apply what we know, but we also have a strong tendency to try to outwit our plan when we do.

Another problem is that while you can see the trading system was profitable in the past, or that someone else is a making a fortune with it, those results are not real to YOU. Until you personally experience profitability over a length of time, you simply don’t have the mental belief structure that this trading plan will work. Since you don’t truly believe it can actually work for you, you are especially prone to trying to outwit your system…which has the cyclical effect of causing poor performance which reinforces your lack of belief in your system, which results in worse performance, and so on.

Another big problem is that traders believe trading should be exciting, with big risks and big rewards…but actually all they want is the excitement and big reward. The big risk is simply what allows for the excitement. But trading with a system can actually be quite boring. When trading in real-time with a system there is no outlet for artistic expression–instead you’re just a robot executing a plan (but this actually doesn’t have to be boring; just watching for signals can be quite an involved process depending on strategy). While people say they are fine with following a plan, in actuality their desire to “express” themselves outside of the confines of their plan is a much greater impulse.

Dealing with It

Even if you extensively trade a demo account prior to going to real money trading, you’ll likely experience this phenomenon, even if you were able to trade your system very will well in simulation.

To overcome this issue, find a simple trading system and implement it with a small account and a small amount of capital on each trade (smallest trade size possible). With this account your goal is not to make money. It is simply to follow the plan. You are building discipline as well as your belief that you can actually trade this system. Take every signal, and commit to it, even though it will be extremely uncomfortable.

You may want to scream while doing this and pull your hair out, because following a plan in real-time goes against our biology. Talk to yourself while you trade, reminding yourself that you don’t care about the money at this point. You are working on your discipline and belief structure so that down the road you will be a successful trader. Realize that it will be very hard to do this, and go easy on yourself. Don’t berate yourself.

Don’t tell yourself “I should do this….”.  There are no “shoulds”, you simply do.

Final Word

Trading every signal your trading plan offers will build your discipline, so you are actually able to take your knowledge and apply it. There are no short-cuts. You will be uncomfortable, but commit to following a plan and taking every signal in spite of that discomfort. Over time, if the system is profitable it will help build your belief that the system is profitable and that you can be profitable–this will make executing future signals easier and easier. Until you go through process–and actually do in the market what you are supposed to do and have practiced–you’re simply gambling.

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