Saturday, September 13, 2014

Three Top Reasons Why Traders Fail to Trade Their Plans

A reader recently asked for perspectives on the issue of difficulty following trading plans.  If only we could faithfully follow our plans, the logic goes, we would be positioned for success.


Scanning my work with traders, here are the three top reasons traders fail to act upon their plans:

1)  The plans are not worth acting upon.  This is a very common reason, but no one seems to talk about it.  I believe people frequently veer from their plans because of intuitive wisdom.  They sense that markets have changed and their plans are no longer relevant; they sense that their plans are not grounded in solid understanding and prediction and therefore do not trust them; and/or they sense that the plans are ones that they have merely mimicked from others and not ones they truly have confidence in.  The presumption in trading psychology discussions is that one should reliably follow one's plans.  My leaning is to question the premise.  Plans are only worth following if they are well crafted and reflect approaches to markets that have a demonstrable edge.  If you don't stress test your plans, markets will stress test you.

2)  We are intellectually prepared with plans, but not emotionally prepared to act upon them.  This is very relevant to the issue of performance anxiety.  When we plan in one state of mind (calm, focused), but execute our plans in a state of flight/fight (aroused, impulsive), we are much more prone to cognitive biases and reactive behavior.  This is particularly the case when our plans call for one level of risk management, but emotionally we can tolerate only a lower level.  It is very common that traders target one level of risk taking (hoping for large profits), only to "overreact" when their position sizing leads to unanticipated losses.  One of the great benefits of visualization and exposure methods is that they allow us to emotionally prepare for stressful events.  As I discuss in the Trading Coach book, it is easier to follow our plans if we have already faced likely challenges to those plans.

3)  Distractions interfere with our follow-through on plans.  Not all disruptions of plans are emotionally triggered.  It is very common for traders to become distracted by their physical environments.  This includes noise levels, equipment failures, and unanticipated personal and market events.  A common example of distraction is staring at screens, following markets tick by tick, and then acting on a very short-term market movement that had nothing whatsoever to do with one's original plan.  I particularly like biofeedback training, not only as a means for gaining emotional self-control, but as a means for improving concentration, mindfulness, and the ability to tune out distractions.

In short, there is no single reason why traders fail to act on their plans.  Keeping a detailed trading journal can be very helpful in identifying when you do and don't follow through on plans, revealing patterns in your own trading psychology.  In general, my advice is to first make sure your plans are worth following before you worry about finding psychological methods for improving your discipline.

Further Reading:  Why Traders Plan Trades But Don't Trade Their Plans