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Paper trading is the biggest mistake that new traders can make. This is the most counterproductive way to learn how to trade properly. When paper trading, every single trading decision is based on zero emotions.

You are actually training yourself how to decide entry and exit targets based on no risk. It is a fact that the greater the risk, the greater the reward. As paper trading has zero risk, it has no reward. It will actually increase your risk to gain reward when you start to trade with real money because you have been teaching yourself how to make decisions that do not apply in the real world. When you start to make these decisions in real life, it will be financially devastating. In order to trade properly, traders must possess 100% technical skills, but they only need to apply 15% of these skills when trading. The other 85% of the equation is keeping their emotions under control. Trading profitably is 15% technical and 85% emotional.

So how do you keep your emotions in check? To do this, you must determine how much money to risk during the learning curve that makes trading a productive and educational experience. We do not suggest that you risk all your capital on each trade to make sure that you are “emotionally trading the markets.” As individuals, we all have a different financial situation, and each person will have a specific zone where a certain amount of money at risk triggers a specific amount of emotion. Do you think a person with risk capital of over $2 million is going to be emotional with $100 at risk? If this person buys 100 shares of a $20 stock and the stock trades down to $19, is he going to have any emotions? I am sure that if he owned 10,000 shares in this situation, there would be a large number of emotions involved, probably too many emotions.

No one can speak for another individual’s emotional level. What each of us must do to make trading educational is to find our “emotional risk level.” I have a friend just starting out that trades a $25,000 account. He finds that a loss of $100 creates an emotional environment and $70 to $130 is his emotional risk level. When this trader is risking $50, there is not enough emotion. When he risks $500, there is too much risk and his emotions are too powerful for him to think clearly and to make proper decisions. After this trader had a month of experience, his emotional risk level increased so he was comfortable, yet still emotional, when risking $400.

The secret to educational and profitable trading is to closely monitor your emotional risk level and change your actions as necessary. This can also mean lowering your risk capital. My friend who was comfortable with $400 had to lower this amount to $300 after he and his wife found out they were pregnant and decided they needed to buy a house because their rented apartment was too small. This added more financial responsibility, and the down payment on their home lowered his risk capital. Numerous variables can come into play and influence a person’s emotional risk level, and only you can judge where this level should be.

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Created on Dec 2nd 2020 04:00. Viewed 78 times.

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