Psychology and Trading

Along with a trading plan, every successful trader also has -- consciously or sub-consciously -- a trading psychology plan. Making the transition from paper trading to real money trading is as much about a psychological capacity as about a familiarity with the mechanisms of trading.

The greatest psychological hurdle to cross is undoubtedly the Fear Of Losing. Fear of losing is the elephant-in-the-room -- the great destroyer of many a trader's dream of "making it".
Fear of losing -- not to be confused with a sensible caution and respect for risk -- inculculates in the beginner trader a fear of taking on potential trades in a market.
He becomes overly selective, entering only those trades which he believes offer the highest potential for profit taking. At the start of his trading day he lets two or trades go by without playing; he suspects they might be "bad trades". During his paper trading initiation he would have unhesitatingly entered these trades. Invariably these couple of opening trades win.
He is now a little bit nervous and disappointed at losing out on some decent profit, and jumps into the next trade. You've guessed it; this trade goes against him, and he loses. So does the next, not because the market went against him in a significant way but that he got out unnescessarily early. Fear of losing has caused this avoidable loss. Erosion of confidence is the consequence of a fear of losing.

Our beginner trader has lost sight of the fact that some trades WILL lose. It is a fact of trading life that even the most experienced and successful sportstraders on the betting exchanges and on Wall Street cannot and will not ever achieve a 100% success rate. Our beginner trader is psychologically wired into a mind-set that allows him engage only in those particular trades that he believes will move in a particular direction. On my website, and it is worth repeating here, I emphasize that it doesn't matter which direction a market is moving -- as long as it is moving, and that you are on the right side of that momentum. The only market that you don't want to waste your time and effort with is a market that is flat and static. Our beginner trader doen't see this anymore; he only "plays" those markets in which he thinks offer an overwhelming chance of profit taking.

The beginner real money trader has abandoned the methods and approach which he developed during his paper trading period, and succumbed to the fear of losing. He now begins to question his paper trading records and doubt his strategy. Nothing wrong with his strategy whilst paper trading, simply that his psychological attitude has changed. If his paper trading profits were proven and valid, then the same should apply to real money trading. Only the fear of losing has conspired against him realizing a successful transition.