If you've seen the movie The Italian Job, do you remember when John Bridger said, "You see those pillars over there? That's where they used to hang thieves who felt fine." If you switch from paper trading to trading with real money, you will feel FINE, too, even if you are scared, insecure, nervous, and emotional.
And what a great metaphor "string up" is, because after all those months of paper trading wins turned into real money losses, you will want to do exactly that to yourself.
The Psychology of Trading Point of View
When talking about trading or thinking about starting to trade, it's important to remember that almost all traders lose.
People say that the reason most traders lose is because they are not mentally ready to trade, which means they are not ready to put their money at risk on something they can't control. Trading is more of a mental problem than a methodological one, and only traders who accept this have a chance of being consistently successful. Without an understanding of trading psychology and the different problems that go beyond method, it will be almost impossible to get past the fear, confusion, and hopelessness that can come with trading. Eventually, after a string of losses, method is replaced by the feeling that you can't do anything right. This is why trading psychology is more important than trading method, if for no other reason.
Trader's New Situation
Imagine that a trader comes up with a way to trade an index future every day. The method gives 15 trades per day, and the trader has reached the point where they can paper trade with the following results: With 9 trades that win on average $85 each and 6 trades that lose on average -$65 each, the average daily gain is $375. The trader has had these results for three months in a row. They have reached their goals for paper trading, so it is time for them to start trading with real money.
The real money trading starts, but things change quickly. Instead of trading their method like they did when paper trading, the trader starts "skipping" trades to try to pick the winners instead of accepting the 40 percent losers. Of course, they always pick more losers than winners. The trader tries to fix this problem by thinking that maybe they are getting into trades too late. So, instead of waiting for the setup to be complete before making a trade, traders now try to guess when the trigger will happen so they can make the trade sooner. This makes the losses worse.
As more and more people die, feelings take over: "What's wrong with me, and why am I such a loser? Maybe it's not my fault; maybe the method just doesn't work."
With each trade, the problems get worse. There are more feelings and more losses, so the trader gives up. The trader now decides that their results from paper trading were not good enough to start trading with real money. They'll go back to trading on paper and studying.
What the trader is thinking about right now: "Maybe I should try different ways to trade until I can stop making bad trades. Then I'll be ready to trade with real money again. Really, I should probably just stop trading altogether. Maybe I'm just not good at it because I'm a loser."
The Trader's Mindset Plan
From this situation, it should be clear that the trader never used their paper trading method plan once they switched to trading with real money. Unfortunately, the trader can't see what they've done wrong. Instead, their feelings make them blame the method, thinking it doesn't work, and then themselves, calling themselves "such a pathetic loser." The trader gives up trading, and if the real reasons for what happened aren't accepted and changed, this trader will never be able to trade real money, even if their paper trading results become 100 percent winners, which is not going to happen.
The trader had a plan for how to trade, but they didn't have a plan for how to trade their mind. They didn't have a way to switch from trading based on fear and emotion to trading the way the method was meant to be used. They didn't have a plan for how to find and understand their non-method actions objectively and then set up a way to replace them.
The trading psychology plan must start with an honest assessment and acceptance of what really happened: the trader never traded their method plan. There are no other people to blame or reasons to give. There is nothing wrong with the trading plan, and even if there was, the trader hasn't used it enough to know how it works. Also, traders can't take trade losses to the point where they make them think, "I'm not a loser just because my trade is a loser."
Parts of a Trading Psychology Plan
Accept that you will lose sometimes when you trade. Not only is it impossible to be perfect, but it is also neither a goal nor a requirement for a trader to make money.
Change your goal to following your plan instead of trying to win or lose. This wasn't done while paper trading because the trader had a specific profit goal that they used to tell them when they were ready to trade with real money. They didn't realise that the reason they were able to reach their goal was because they stuck to their plan.
Stay neutral and don't criticise or judge yourself. If you want to ever make money trading, you have to do this. You can't trust yourself to handle risk if you call yourself "stupid" or a "pathetic loser" every time you lose or feel like you did something wrong.
The goal isn't to get rid of your feelings; I don't even think that's possible. Trading will always involve feelings. Learn to control your feelings instead of letting them control you.
Accept that emotions are a part of life. They aren't inherently good or bad, and if you can change your perspective on what they mean, they can be very helpful to you as a trader. For example, if I'm confused and that makes me feel a certain way or hesitate, I want to feel that way. This feeling tells me that I should wait and look for more chart-market clarity before making a trade. This is something that often happens when markets are crowded.
- Take things slowly at first. This may be the most important part of your plan. For example, start trading real money for an hour at a time. Then, look at what you did and ask yourself if you stuck to your plan or made trades that weren't part of it.
Even so, you won't be able to get close to your paper trading results because that plan was based on making an average of 15 trades per day. But this will not only help you shift your focus from how much money you made to whether you stuck to your plan, but it will also help you get used to the logistics of real-time, real-money trading and the feelings that come with it, like how all of a sudden the market seems to be moving much faster. By doing this, you will "build up" to trading your full plan at a pace that won't make you feel so overwhelmed by the process that you immediately stop what you had planned to do because fear and emotion are too strong.
You have a great way to trade and a good plan for how to trade. You've made money trading on paper, so you're ready to trade with real money. Just make sure that your trading psychology plan is as good as your trading method plan and that you know neither will help you if you don't have the other.
