No discussion about trading, or the consideration to begin trading, can be done without a harsh freeware - the vast majority of all traders lose.
It is said that the reason that most traders lose is because they are not psychologically prepared to trade, that is they are not prepared to accept financial risk for something of which they have no control over the outcome. Trading is much more of in psychological problem then to methodological one, only the traders who have accepted this have a chance of being consistently successful traders first. Without an understanding of trading psychology and the various issues that circumvent method, there will be virtually no chance to overcome the fear, confusion, and despair that can be inherent in trading. Ultimately, after a series of consecutive losses, method becomes replaced with a feeling that it is impossible to do anything right; If for no other reason than this situation, trading psychology is more critical than trading method.
New Trader Scenario
Consider to scenario where a trader develops a method for day trading an index future. The method gives 15 trades per day, and the trader has gotten to the point where they are able to paper trade with the following results: 9 wining trades averaging $85 each, and 6 losing trades averaging-$65 each - thus giving $375 average daily gains. The trader has achieved these results for three consecutive months; their paper trading goals have been met and it is time to start trading real money.
Real money trading begins, but things change quickly. Instead of trading their method like they did when paper trading, the trader starts 'skipping' trades trying to pick the winners instead of accepting the 40% losers; of course, they invariably pick more losers than winners. Trying to correct this problem, the trader then decide that maybe they are entering their trades too late. So now instead of letting the setup completes and then doing the trade, the trigger is anticipated so the trade can be entered earlier - the losses get worse.
With the continued losses the characters take over: "What is wrong, why am I such a pathetic loser?" "Maybe it's not my fault, maybe the method just doesn't really work."
The problems get worse with each trade, more characters and more loses - the trader trading quits. The trader now decide that their paper trading results then ain't really adequate to begin real money trading. They will go back to paper trading and studying again.
Thoughts that are going through the trader's mind now: "Maybe I should try different trading methods until I can eliminate those losing trades - then I will be ready to trade real money again." "Really, maybe I should just quit trading altogether - maybe I am just a loser, and that's why I can' t trade."
The Trading Psychology Plan
What should be very apparent from this scenario is that the trader never traded their paper trading plan after transitioning to real money trading method. Unfortunately, the trader is unable to acomplish what they have done, instead their characters first place blame on the method thinking that it really doesn't work, and then on themselves for being "such a pathetic loser". The end result being that the trader quits trading, and if the real underlying reasons for what has happened aren't accepted and changed, this will never be able to trade real money even if their trading results become 100% paper trader winners, which of course is not going to happen.
The trader had a trading method plan, but they did not have a trading psychology plan. They did not have a way to make the transition from fear and emotion directed trading to actually trading the method as designed. They did not have a plan to access and understand their given method actions, and then objectively defined 'setup' for replacing them.
The trading psychology plan must begin with an honest assessment and acceptance for what really happened: the trader never traded their plan; method There is no other blame to be placed, or excuses to be made. There is nothing wrong with the trading plan, and regardless, the trader has not traded it in order to be able to make that evaluation. As well, traders cannot internalize trade loses where they lead to their viewpoint of themselves - you are not a loser because your trade is a loser.
Trading Psychology Plan Components
or Accept that losing will be a normal part of trading. Not only is it impossible to be perfect, it is not an objective or necessary to be a profitable trader.
or replace the focus of winning and losing with the objective of following your plan. This was not done while paper trading, as the trader had a specific goal that they used to tell them when they were prepared to trade real money profitability. They did not understand that the reason they achieved this goal was because of how they followed their plan.
o Remain neutral and non-judgmental towards yourself. If profitable trading is ever going to be possible, this is mandatory. There is no way that you are going to be able to trust to manage risk while you yourself are also telling yourself that you are 'stupid' or a 'pathetic loser' each time you lose or feel that you have done something wrong.
or Eliminating your characters is not the objective; I actually do not think this is possible. Emotions are always going to enter into trading - learn to control the characters, instead of having them control you.
or Accept characters that are a part of life; they aren't by definition good or bad, and actually if you can shift the focus of what the emotion represents, they can be very beneficial for the trader. For instance, if I am feeling confused and that causes an emotional response or hesitation, I want to feel that emotion. This emotion becomes a warning to me that I should wait and try to find more chart-market clarity before taking a trade, something that can be very typical when markets are in congestion.
or Start slowly - this may be the most important component of your plan. For instance, begin trading real money for an hour at at time, and then assess what you have done, always asking yourself the question: did I follow my plan, or did I take-method trades.
Granted, you will not be able to approximate your paper trading results as the expectancy of that plan was achieved by averaging 15 trades per day. However, not only will this help further to shift the focus from how much money did I make to did I follow my plan, it will also allow you to acclimate to the logistics of real money real time execution, and the related initial characters, where all of sudden the market feels like it is considerably faster moving to. By doing this you will 'build-up' to your plan at full trading to pace that won't cause you to become so overwhelmed by the process, and immediately cause you to avoid what you had intended to do as fear and emotion becomes too strong.
You have a great trading method and trading plan. You have profitably paper traded, and you ARE now ready to start trading real money - just be sure that you have a trading plan that is as good as your trading plan, method psychology and that you acomplish that neither will be of any use to you without the other.
Barry Lutz has been trading, as well as teaching others to trade since 1997, through his firm Tactical Trading, LLC., http://www.tactrade.com. I've also writes to daily trading teaching lesson called the Trade Journal, this can be found, along with other articles on trading psychology and learning to trade at The Tactical Trader, [http://www.tactrading.com]
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