Letting fear and greed guide trading decisions during the market volatility in March 2020 might have been tempting. Some investors abandoned their plans as the market indexes swung into bear market territory, despite advice to resist selling in a panic.
Yet just as history suggests, the extreme volatility in the markets seems like it may be short-lived. By early June 2020, the market indexes have shown signs of recovery. Those numbers are good news for those who stayed committed to their trading plans during the uncertainty (or made some adjustments based on market conditions).
Planning and maintaining a strategy can help traders feel prepared and stay focused during trading sessions. However, trading plans can be dynamic and do not have to be set in stone. As your experience shapes your trading habits, you may find your current trading plan may not be as effective as it once was.
If you are considering rewriting your plan, ask yourself if the doubt is coming from a spontaneous panic or from any specific indicators. Whether you have changed your goals as a trader or you simply find you are logging more losses than wins, your current trading plan may no longer be working for you. The following signs may suggest the need to switch your plan to a more successful strategy.
YOUR STYLE CHANGES
Anyone with any experience in the markets would say he is not the same trader today as he was when he started. Making mistakes as a beginner is an essential part of learning to improve, and your technique may change as a result. For instance, your risk tolerance may evolve over time, whether you felt you were too reckless before or you have gained more confidence with your risk. As you discover your strengths and weaknesses as a trader, your trading plan may need to evolve with you.
YOU HAVE NEW GOALS
Each trading plan should have specific, measurable profit targets and timeframes. If you are consistently hitting your goals, congratulations! You may be ready to reach the next level with some new goals. If you have not been meeting your goals, a more realistic approach for the next quarter might be right for you.
After reviewing your performance in your trading journal, you may want to set more conservative targets or choose more ambitious goals based on your self-evaluation. Checking in on your weekly, monthly, and annual targets is an opportune time to review your ideal risk/reward ratio or determine how much you want to improve the value of your portfolio.
YOUR FOCUS SHIFTS
Over time, you may decide to try different aspects of the market. If you want to trade different instruments or switch to a different style of trading, your strategies may need to change, as well. After all, a trading plan tailored for swing trading may not be applicable for someone ready for single-session day trading.
Alternatively, your schedule may change, and you no longer have the same amount of time you used to commit to trading. If you transition from day trading to swing trading, your preparation and methodology should reflect that.
YOU WANT YOUR OWN PLAN
Developing a trading plan can be overwhelming, especially for novice traders. Studying books, blogs, and influential traders can be useful, but copying your plan from someone else can be tricky. Whether you modeled your plan after someone you admire or you were too insecure to draft your own plan, following someone else’s strategy — even one that is successful for that person — may not work for you.
One trader’s risk tolerance, starting capital, or ability to recover from emotional wins or losses may not align with another trader’s plan, so following that template may not be effective. Moreover, critically evaluating your own strengths and limitations while designing your own plan can help you become a better trader.
YOU JUST KEEP LOSING
A losing streak seems like the most obvious reason to change your trading plan, but this comes with a caveat. Many traders are most tempted to ditch their plan immediately after a devastating loss because they let the adrenaline of the moment rule their decisions.
Blaming the trading plan for a loss is easier than accepting errors in judgment; moreover, some traders may lose confidence in their strategy if a trade backfires. However, making decisions based on emotions leaves room for error. Instead, traders should review what went wrong with a critical, unbiased lens.
On the other hand, if there seems to be a consistent pattern, your trading plan may indeed be the problem. Consider reviewing your recent trades and their final values. If the account balance at the end of each trade is lower or the total number of losses exceed the “break evens” or “wins,” you may need to update the exit rules for your trades.
Finding the right timing to replace your trading plan can be complicated. Choosing between “staying the course” and “abandoning ship” is a judgment that depends on critical thinking. Yet if you trust a new trading plan can course-correct your goals, it could be a productive way to revitalize your trading.