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Home » » 5 Reasons Why a Trading Plan Fails to Generate Profits

5 Reasons Why a Trading Plan Fails to Generate Profits

Even with careful preparation, trading plans often fail in practice. Why does this happen? Before diving into trading, the primary step is to create a comprehensive trading plan, including entry strategies, risk-reward ratios, and other critical points. A well-crafted trading plan is expected to help traders achieve profits. However, sometimes even a good plan doesn’t go as expected. Here are the five main reasons why a trading plan fails to generate profits, according to Hugh Kimura from Trading Heroes.

  1. The Trading Plan Is Not Properly Tested For example, a trader might buy a book containing trading plans from an expert and immediately apply them. After a month, they face a 10% loss. The main problem is that the plan hasn't been properly tested. Backtesting is essential to determine the success potential of the plan. Ensure your trading plan meets three viability criteria:

    • Demonstrates potential from your strategy.
    • Boosts confidence during trading.
    • Shows profit potential through the established risk-reward ratio.

  2. Mismatch with Personal Trading Style A trading plan that doesn’t align with your trading style can also lead to failure. Different types of traders—Scalpers, Day Traders, Position Traders, and Swing Traders—have varying approaches. For instance, if you’re a Scalper who likes trading on short time frames with small, frequent profit targets, your trading plan should align with scalping strategies. If not, it won’t be successful.

  3. Poorly Constructed Plan A trading plan should be practical, realistic, and effective. Each step of the trading process needs to be detailed, including short-term and long-term plans and how to implement them. Additionally, the plan should cover risk tolerance, the best times to "break the rules," and designate "off days" from the forex market. A comprehensive trading plan can help you navigate various market challenges.

  4. Lack of Flexibility and Development Even with a detailed plan, flexibility is crucial. While discipline is important, so is adaptability. For example, if your trading plan sets specific Stop Loss and Take Profit levels, but you spot a better technical opportunity, it’s acceptable to make adjustments. Furthermore, the trading plan should be continually updated to reflect changing market conditions. Without flexibility and ongoing development, your trading plan might fail.

  5. Not Habitual The final reason for a trading plan’s failure is not making it a habit to write the plan and record challenges faced during trading. Trading activities should be documented in a trading journal that includes all trading results based on the plan. Regularly maintaining a trading journal allows you to learn from experiences and avoid repeating mistakes. Understanding the obstacles in trading and devising solutions is one of the key benefits of a trading journal.

A trading plan is designed to guide and direct trading activities. However, if the plan fails to generate profits, it’s essential to investigate the reasons. The plan may not have been properly tested, might not match your style, could be poorly constructed, or lacks the flexibility to be applied effectively. Additionally, failure could stem from not making it a habit to document the plan in a journal. If this is the case, it’s time to make improvements to ensure that profits become more than just a dream.

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