6 Reasons Your Trading Strategy Might Be Underperforming
One of the key lessons new forex traders learn is the importance of putting together a solid trading plan. This involves using specific techniques such as technical or fundamental analysis to help you make well-informed buying and selling decisions, and to make the most of the lucrative opportunities offered by instant forex funding platforms.
It can take some time and experience to build an effective trading strategy, and even seasoned traders regularly review and make adjustments to optimise their plan. Nevertheless, it’s important to make any changes after evidence-based research rather than abandoning your plan at every setback, or halfway through a trading session.
Here’s a look at some of the reasons why your trading plan might be underperforming, and the right way to introduce changes.
Overcomplicating your strategy
New traders often assume that the more detail they pack into their strategy, the more effective it will be. However, this is not always the case: sometimes very simple strategies can be just as effective as more complex ones. There is no need to try to anticipate every move in the market, as you will just get bogged down in information overload.
It is possible to copy the strategies of more experienced traders that you hope to emulate, but chances are you won’t fully understand it. This is not to insult your intelligence, but rather because the trader will have probably evolved their plan over time, and it would be impossible to be familiar with all the nuances without fully knowing the whys and wherefores.
The best course of action is to start off with a simple strategy that is straightforward to carry out, based on solid fundamental and technical analysis.
You have unrealistic expectations
Many new traders set unrealistically high profit targets for themselves. This is understandable, as ultimately we are in this game to make profits and the allure of ‘get rich quick’ is strong. However, this is likely that you will put too much pressure on yourself and end up making poor decisions, or become so discouraged that you give up altogether.
Instead, set yourself small achievable goals that are backed up by a clear risk management plan. Remember that successful forex trading is not about wild highs and lows, but a steady process of taking carefully calculated risks.
You have not backtested your trading strategy
The best way to ensure that your trading plan is watertight is to test it out on a demo account first. This not only helps you to become familiar with it without risking any real money, but will also reveal any glaring holes.
It is unrealistic to expect any strategy to return profits with every trade, but if after a run of two or three months on a demo account where you have made more losses than gains, you will know that the plan is ineffective. Make sure that you keep a trading journal and write down your reasons for making each trade, so that you can analyse your performance.
This will help you to identify any weaknesses in the trading strategy and make the necessary adjustments. For example, if you are a very impulsive and impatient person who likes to get instant results, then you are probably more suited to day trading or swing trading.
You are implementing the plan inconsistently
The golden rule of successful trading is to follow your trading strategy. As we will discuss in the next point, a trading plan can, and should, change over time and to respond to the current market conditions. However, you need to stick to your plan consistently for a certain length of time to assess its effectiveness.
Unless the financial markets are rocked by a sudden catastrophic event, you should never deviate from your plan mid-trade as this could leave you exposed to excessive risks. A plan helps you to maintain a systemic approach to your trades, and avoid making impulsive decisions that might be led by your emotional responses rather than rational processes.
Do not underestimate the role of psychology in the success or failure of your trading strategy.
The strategy is not evolving
Some traders become fixated on the concept of the bulletproof trading strategy that will guarantee them wins, but there really is no such thing as the Holy Grail. Your trading plan should not be cast in stone, but treated as a live project that needs space to breathe and grow.
The forex market is the most dynamic and volatile financial market in the world, and it is strongly influenced by a wide range of factors, from geopolitical events to the latest economic data releases. Therefore trading strategies are rarely a case of sticking rigidly to the same approach, of maintaining a system of checks and balances.
This is not to say that you should deviate from the plan in response to every ripple in the market, but rather that a good trading strategy is always a work in progress. As a forex trader, you should also be a diligent student, continually expanding and updating your knowledge so that you can make the best trading decisions.
If your current plan is returning steady profits and you are satisfied with your progress, you may not need to do any more than periodically review it and ensure that it is up to date with the current market developments.
Your trading plan is incompatible with your personality and lifestyle
It may be that the trading plan is fighting against your natural tendencies and lifestyle. For example, if you are a naturally cautious person with a low risk tolerance, then a strategy that involves a high risk vs. reward ratio may not be suitable for you. On the other hand, if you are naturally quick witted and impatient, long term positions trading may be too slow for you.
Spend some time considering your personal traits, best qualities and weaknesses. You may even wish to take an online personality test to obtain a well-rounded and objective assessment, because we all have blind spots.
You could also ask family and friends or work colleagues, but they may not be completely honest for fear of causing offence (or maybe a bit too honest: sometimes the truth can be hard to handle).
However, there is no need to aim for perfection or try to correct any ‘weaknesses’. We are all naturally more able and skilled in some areas than others, so it’s an opportunity to identify and focus on what you do best.
Another factor to consider is how much time you have to devote to trading, and whether you view it as a side project to earn a little extra cash, or if you are working towards the goal of a full-time trading career. Determine your risk tolerance and make sure that this aligns with your trading plan.
It should take into account your personal financial situation, how comfortable you are with taking financial risks, your profit targets, and your current level of knowledge and experience. Be honest with yourself about your current situation: you do not want to compromise your ability to pay for life’s essentials.
If the thought of losing the amount of money you are risking on each trade is keeping you awake at night, then you are obviously not comfortable with your trading strategy, and will also be harming your psychological wellbeing. It may be that you could benefit from discussing your financial situation and investment goals with a financial advisor.
Furthermore, you need to consider how much time you have to devote to trading, and how you will maintain a satisfactory work-life balance. If you are fitting in your trading around a full time job or other commitments, then your trading plan would work best with long-term trading that is less time intensive than day or swing trading.
Conclusion
If your forex trading strategy has so far returned disappointing results, then it’s time to review and adjust. Very often, new traders try too hard with overcomplicated strategies that are copied from more experienced traders, but it’s never a one size fits all approach. Start simple, which can be just as effective if it’s carried out properly.
Find a balance between having the discipline to stick to your trading plan consistently and revising it in the face of changing market conditions. Successful traders are emotionally intelligent and do not allow fear, greed, panic, or anger cloud their trading decisions.
The most effective way to do this is to always have a well-optimised trading plan and stick to it during stressful trading moments. Do not be tempted to deviate from your plan mid-trade; revisions should be made when you are in a calm and objective frame of mind.
Refining your strategy is an ongoing process, and learning to adapt in the face of challenges is all part of the learning curve. Educate yourself and learn from others, and over time your patience and persistence will begin to pay off.