Why Forex Traders Plan To Fail Before
They Even Place Their First Trade

Have you heard the wise saying that a forex trader who fails to plan, plans to fail?

Did you know that even though currency traders who have constructed a plan, which incorporates their forex trading strategy (their “edge”), they have a plan that is STILL likely to see them fail?

If we look at all forex traders who participate in the currency market: we have one group that fails to plan and therefore plans to fail; another group whose plan is failed; and a third group who properly plans and therefore does not fail.

Is it any wonder that the success rate for forex traders is so slim?

Well it doesn’t have to be.
Here’s a list of reasons why those who have a plan are still destined for failure:

1. They become emotionally attached to their ideas about how the market should be with minimal or inadequate testing;
2. They fall in love with their back-tested net profit results without fully understanding other key statistical data;
3. They don’t admit they’re plan *is* failing.

Let’s explore each point in a little more detail.

1. Becoming emotionally attached to your ideas without adequate results

Most new currency traders when they realize the importance of obtaining a forex trading plan and sticking to that plan immediately begin to use the knowledge they have been taught and haphazardly throw it all together into what they deem their “forex trading plan”.

When they are questioned on whether they have a forex trading plan most of these traders answer with an unequivocal “Yes!”.
Most of these traders are destined for failure because their strategy is untested. They rely on blind faith to guide them through the trading jungle to make their untold millions. Would you walk from one length of the Amazon jungle to the other blind-folded?

Of course not!

You’ll have to watch out for all the snakes, tarantulas, and other creepy things that go bump in the night… so why would you approach forex trading in the same fashion?

I mean all you’re really doing is placing the blind-fold on your capital!
Why do traders do this?
Because it’s easy.
That’s right… it’s easy.

They don’t need to learn a computer language to type their system into some piece of software that will take them the better part of 6 months to learn, and they don’t have to spend any money on buying historical data. Therefore it’s easy and it’s cheap and it also conserves time.
So does success meet lazy people like this?
Not many!

However, I’ll admit that it does meet a fortunate few - only those lucky enough to start their forex trading during roaring markets where even a blind monkey can make money!

To repeat again: don’t wear the blind-fold. Your success may be great at the start, but given time and trades, you’ll be the one out of the game - having depleted all your capital.
So what do you do if you KNOW that your method is untested?

If you have the time, the money and the learning capacity I would strongly encourage you to use some back-testing software (such as Metatrader platforms), ask heaps of questions on the MetaTraders forum on how to code your ideas and within 3-6 months you’ll be safely coding your own forex system and testing it adequately.

If you do not have the time, the money nor the learning capacity I would strongly suggest that you manually write down your forex system into clearly defined steps that you MUST follow. Then, after opening a DEMO forex account trade your system according to the rules you’ve specifically set out. Trade your rules until you’ve reached about 30 trades before even beginning to TOUCH your rules - don’t change them after every single loss.

After forex traders obtain their results from their testing period they unfortunately look at only one figure and make a rash conclusion about the system based on that one performance figure, namely, the net profit.

This leads us into the next problem of why traders plans are failed prior to placing their first live trade.

2. They fall in love with the net profit result and no longer question it any further!

The net profit is only one statistic among thousands, however, to keep things simple we will look at the top 3 results that you need to make sure you fully understand.
Here are the other statistical pieces of data that you should look at when your forex system has completed its testing period:

How many trades did it have? If you have made a nice profit, but have only had 3 trades during the testing period you do not have a sufficient sample space to arrive at any safe conclusions. Can you imagine what would happen to Neil Armstrong if NASA had only done 3 computations on how they would arrive on the moon?! If it’s not good for NASA then it’s probably not good for you either, however, as NASA do zillions of computations you would only need to conduct about 30 trades as the bare minimum before you can arrive at any safe conclusions;

What was your money management procedure during the testing phase? This is by far the most important point, however, you need to make sure your system is properly working prior to even embarking on this difficult area (hence the reason why it is a CLOSE second to the above point). Be sure you fully understand what I am about to explain (read it several times to absorb it if need be)…
If you test a method whereby you rely on a percentage amount of capital on a trade you can be biasing your results!
How?

Let us look at the following comparison sheet where we plot 21 trades with their pip return (we’ll assume that each pip = US$1), and compare the returns against using 10 contracts per trade, 10% capital per trade, or 2% risk per trade.

Now as you can see the end results can easily be doctored according to the different type of money management technique you use and what variable you decide to use it on (i.e. who is to say that we not use 20 contracts per trade, or 20% capital, or 5% risk per trade - all of these would inflate the net return figures).

When you trade the forex markets it’s best to stay at a fixed quantity. If you use any results that require a percentage calculation of the equity balance prior to the trade quantity being calculated you will BIAS the last trades more than the trades at the start. Hence, using a fixed quantity throughout the entire sample is one of the true indications of whether your forex system is profitable or not.

What was the drawdown? This is the largest peak to trough distance on your equity curve. In other words, if you were to enter in on the day the equity curve made a peak, how much would you have lost if you bailed out at the lowest point? To test this manually you would obtain an equity curve peak trace how far the equity curve goes down until it moves higher that the peak you started from - the lowest point made between these two points will be your trough figure which you will then subtract from your starting peak figure. The figure with the largest % loss would be your drawdown.

You would then need to look at this drawdown figure and determine whether or not it fits your risk profile. Would you be okay mentally if your account was down the drawdown % figure? If not, then you’re going to have to re-create another system. As a rule I don’t like forex systems that generate more than 15% drawdown.

One other statistic that incorporates drawdown that I like to check to determine whether the forex system is profitable or not is the recovery factor. The recovery factor divides the net profit by the drawdown (without the negative sign). As an example, if the net profit were $5,659 and the drawdown were -$3,542 dividing the net profit by the drawdown would result in a recovery factor of 1.597 (get rid of the minus sign). I generally prefer systems to have this statistic above 3.

So even though we have created our system that fits our personality and risk tolerance level well trades can still fail by not heeding the third and final statement.

3. Don’t fall in love with the forex system

How do you know if your forex system is no good?
As a rule I look at the historical drawdown of my system and add 10%. As an example, if my system had historical drawdown of 5% once the trading system reached 5% x 1.1 = 5.5% I would stop trading this system and move onto another. And sometimes you can still trade the same forex system, just with different variables, or a minor tweak.
Be sure that you fully understand the implications presented to you in this article. Forex Trading is a business, therefore conduct it like one, as it is one of the most difficult endeavors you could ever undertake.