This is an excerpt from an article written by
Janice Dorn, MD, PhD
Neuropsychological Trading Coach.
I find it interesting and appended it below for your
reading pleasure.
How To Control Your Trading Risk
What is your biggest problem with your trades?
I’ll bet it is not your stock picks or the entry. Let me guess…
it’s your losses. The way to reduce the long term
Money management is the most neglected, and the most
important aspect of trading any market. New and intermediate
traders tend to fixate on entries and exits and every new
stock indicator out there. They'll tell themselves that money
management is “something I’ll pick up later when I need it
." But here's the deal......If you lose 50% of your money;
you need a return of 100% to break even. year after year.
If you lose 100% of your money, you have none left and
you need to get another job.
A large part of money management is position sizing, and it
has two components-- psychological and practical.
From a psychological point of view, popular piece of advice to
beginning traders is to do "paper trading." That is you gain
experience by “trading” for a while without using real money.
You go through the motions of buying and selling without
using real money. and utilize your trading strategy you
have as if you were trading " for real."
DO NOT PAPER TRADE. It is one of the worst things
you can do because it makes you overconfident or underconfident
and does not take into account the true reality of trading.
Emotions areover 85% of trading, and paper trading does not take
this into account. Thus, you are missing the most important
aspect of trading when you are on paper. You do not
experience fear, greed, happiness or panic when you
paper trade.
The emotions from paper trading are not real and have
nothing to do with the roller coaster of emotions you feel
trading when your money is on the line. Only by actual
trading do we make all the mistakes we need to make in
order to make ourselves strong and resilient and brave and
confident as traders.
