Nobody ever lost his or her car payment or mortgage payment by paper trading. Paper trading is basically just writing down your entry and exit points for a stock and then calculating the profit or loss. Many of today’s day trading firms have simulators built in to their systems to almost completely replicate the actual execution systems of that firm. I say almost replicate because there is one feature that cannot be reproduced and is very different for every trader. That feature is FEAR.
Paper trading does not give you that funny feeling in the pit of your stomach when your position is tanking, or the elation of seeing the screen turn a lovely shade of green as your stock breaks through a resistance level. Basically there is very little emotion involved when paper trading. New traders rarely understand the psychological effect of seeing real money ebb and flow to and from your account. Having actual money in play is a very emotional thing and many traders succumb to the stress of it.
When I was teaching others to trade I expressed a great deal of concern over how certain people would react to trading real money in real time. It was easy to pick out some of the newbies that would not be able to handle the pressure. There were analysts and brokers who came from big firms insisting that they have been waiting for a chance to trade for themselves. Be careful what you wish for because until you are actually putting your hard earned money on the line you really don’t know how you will react, especially if things go against you. I have had garage mechanics and waiters do much better than some MBA’s and brokers.
When moving from paper trading to real trading give yourself a set of rules that are in line with your ability to accept losses. Position size, and liquidity of a stock should play a large part in how and what you trade. Start slow and learn to deal with the fear and don’t let that fear get in the way with your ability to make sound decisions. When people are down a few days in row they either begin to swing wildly for the fences or become afraid to pull the trigger on a sound trade out of fear it will turn against them.
When I was starting to trade a very long time ago I ran into a period of time when I was taking too many losses. I wasn’t afraid to enter a trade as my logic and chart recognition was sound, however I began taking smaller and smaller profits on my winning trades rather then let them run to where I thought would be a good exit point. Fear dictated my actions and I left much too much money on the table. My risk was the same as if I let the trade work a bit longer but by taking smaller profits I reduced my reward possibilities substantially.
Basically there will always be a certain amount of fear whenever something is at risk. But understanding the risk and learning to consistently make sound decisions regardless of whether you have a negative or positive P&L, you will have a much more likelihood of staying in the game.