After going to the trouble of developing and implementing a trading plan, why would a forex trader ever begin breaking their own trading rules?

Each individual trader will have a different answer to the above question. In many cases, inexperience is the first culprit. "Rules are meant to be broken" simply does not apply when trading in volatile market environments, as many a forex trader can attest. Unfortunately, many trading novices seem to choose especially volatile times to break their own rules, just when they should not.

A series of other reasons typically arises for more experienced traders, but whatever the cause, losing discipline with one's own rules can often lead to a trading blow-out. This can put the trader firmly out of business regardless of their previous trading success and experience.

An Example of a Costly Mistake

An example of an easily avoided mistake which tends to be made often involves not entering a stop-loss order immediately after entering into a position. Some traders that trade forex without stop-loss orders can see their accounts wiped-out on just one all too common currency spike.

Trading without a reasonable risk assessment and management strategy can spell disaster in the highly leveraged game of the forex market. With leverage ratios of up to 500:1 for some accounts, a large sum of money can evaporate in what seems like an instant. In the U.S. the maximum leverage is 50:1 for majors and 20:1 for minors.

Purposely trading without a stop-loss and prolonging a losing position can arise from the trader's perception that the market will turn around if only they are patient, which may or may not ever happen. Basically, the trader has already psychologically placed themselves at a disadvantage.

The trader eventually chokes on the growing loss and closes out the position near its worst point, only to see the market subsequently recover. They are devastated and so is their trading account.

What the Trader Dealt With Emotionally

The trader in the above example could have avoided all of the stress of riding out a losing position and taking a large loss. He just needed to maintain his discipline and cover his position with a stop-loss order to get out of the market if the market went against it.

Watching your savings go out the window as a screen flashes numbers is not a pleasant experience. Nevertheless, many people who are attracted to trading the forex market eventually wind up committing errors and disregarding their own trading rules only to have exactly that happen to them.

Subconscious Impulses

While the above situation may appear to be tragic, in many cases the person is looking for the loss on a subconscious level. They might even react in the same way regardless of a good trading plan or a large well-funded account.

Basically, the loss was needed by the person on some level, whether to get attention or because they did not feel they deserved the large profits they might otherwise be fully capable of making.

As a very wise trader once said, "Everybody gets what they want from the market."

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.