Graduating To Real Money From Paper Trading – The
Problems We Face
The idea of paper trading can seem like a tedious
time waster to those of us who are eager to get started in the
World of the financial markets. By starting with real money we
can immediately tap into the excitement of the markets and start
earning the millions we have always dreamed of. However, jumping
straight in with real money very rarely works. There are several
reasons for this: we have no robust strategy, the strategy we have
that we believe to be robust is in fact a loser, the signal service
we use is poor at best and is incapable of producing profitable
trades and the most profound reason of all: we have no idea of
the emotional roller coaster trading with real money creates and
how it effects our decision making skills.
Patience On Paper Pays
Each of these problems can be overcome but this article will focus
on the latter. Therefore we will assume that we have a profitable,
proven strategy that has shown its effectiveness in a range of
market conditions and we have proven our ability to work with
our strategy (yes this means paper trading!). At this point I
would like to stress the importance of paper trading. If you
can’t make money in a practice account then guess what,
you will just be giving money away in a real account. Sure, we’ve
all done it but just don’t do it again OK! There is no
substitute for patients in the financial markets and if you are
the sort of person who lacks this quality (the sort of person
who will skim read this article) then you will need to learn.
Fear Of Loss
Paper trading teaches us how to implement a strategy. It teaches
us how to follow rules and recognise patterns, it even teaches
us the basic of market dynamics such as how to enter an order.
What it doesn’t teach us however is how to manage our emotions.
Someone who has never traded with real money will be all to unaware
of the emotional and psychological side of the vocation. Sure,
there is some emotional involvement in our paper trading; we
all want our strategy to prove itself and our skills to be refined
with experience producing a higher success rate. However this
emotional involvement doesn’t even come close to what we
will feel on the first day our real money is at stake.
Changing Our Plans
As emotional discomfort increases so does the
likelihood that we will change the way we trade. There is a common
vicious circle that first time ‘real money’ traders
expose themselves to that can quickly spiral out of control. Fear
of loss can lead to hesitation on entries and exits. Now losing
trades become even larger and winning trades are reduced in size
or missed altogether. The first seeds of doubt are sewn and a trader
will begin taking riskier entries in order to recoup what he/ she
has missed out on. When these riskier trades begin to lose trading
accounts begin to take a real battering and self-doubt controls
our thoughts. Hesitation and frustration will lead to even more
losses and most traders will either give up an emotional wreck
or a few thousand dollars worse off, quite often both.
Click to read Part
2: Controlling Our Emotions - Back
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