Why do traders lose their minds and forget everything they’ve learned about trading the second they put money on the line in a trade?
The answer is emotions, specifically fear and greed. You may have heard that somewhere in your trading world.
So why is reality so different from paper trading, and why paper trade in the first place if it’s so different in the real world? Well, answering the second part of that question first, it beats losing real money and your trading coach wants you to do a lot of it.
You paper trade to learn and develop good trading habits. You learn how to read your charts, how to read the markets, how to find patterns, what to avoid, what to look for…and most important, you learn to trust your judgment. Get a record of accomplishment going in your paper trading then do the real thing. You will sense when you’re ready.
Either you know what you’re doing or you don’t. Learn how not to lose in the market and you are actually beginning to learn how to trade! Paper trading helps you do just that but ONLY as long as you trade and execute according to your game plan. Paper trading without specific rules of entry and exit (read use limit orders) is just playing make-believe. Bad habits developed here will follow to the real world.
What is the difference between ‘Forward’ and ‘Backward’ paper trading? In Forward trading, you find a stock, decide to trade it today in real-time at the right edge of the chart and then you must wait, as in a real trade, for the outcome in the next few days. In Backward trading, you are working in the past part of the chart, hiding the future, but making buy/sell decisions as if the day you are looking at, at the right edge, is today (the future part of the chart is unseen). The benefit is that you have instant knowledge if you called it right or wrong. You can do hundreds of these on any one chart as you look for reversal points, resistance or support levels and the longer-term reversal or continuation patterns. You will really benefit from backward trading. Try it the next time your stuck inside on a rained out weekend.
When you use a cleaning product for the first time they tell you to test
This is what you should see in your notes paper or real:
- What specifically did you see in the chart’s indicators? chart checklist
- How is the sector doing? chart checklist
- What are the broad market conditions? chart checklist
- Any other research you did that pushed you to act?
- What off-chart events were you reacting to, if any? off-chart checklist
- Where or how did you find this stock?
- Note, any negative signs that you observed. That, perhaps, is the other side of your trade. Don’t you want to see what the counter-trade is seeing?
This is critically important when you review your trades. This is what will help identify what is working for you and what is not. In effect, it is the only way you have to improve as a trader, by eliminating what does not work and continuing on with what does. Don’t trust your memory, write it down.
How will you be able to tell what went wrong with the trade if you don’t make note of observable facts?
You may still need a trading coach to guide you through this maze called the stock market.
What luck, that’s what I do, I coach you, if you’re a willing student.