No discussion about trading, or the consideration to begin trading, can be done without a harsh realization -- the vast majority of all traders lose.

It is said that the reason most traders lose is because they are not psychologically prepared to trade; that is, they are not prepared to accept financial risk for something, the outcome of which they have no control over. Trading is much more of a psychological challenge than a methodological one; only the traders who have first accepted this have a chance of being consistently successful.

Without an understanding of trading psychology and the various issues that circumvent method, there will be virtually no chance to overcome the fear, confusion and despair that can be inherent in trading. Ultimately, after a series of consecutive losses, method is replaced with a feeling that it is impossible to do anything right; if for no other reason than this, trading psychology is more critical than trading method.

Consider a scenario where a trader develops a method for day trading an index future. The method gives 15 trades per day, and the trader has gotten to the point where he or she is able to paper trade with the following results: 9 wining trades, averaging $85 each and 6 losing trades, averaging -$65 each -- thus giving $375 average daily gains. The trader has achieved these results for three consecutive months; meeting paper trading goals, so, now, it’s time to start trading real money.

Real money trading begins, but things quickly change. Instead of trading method as the trader did when paper trading, the trader starts “skipping” trades, trying to pick the winners instead of accepting the 40 percent losers. Of course, he or she invariably picks more losers than winners. Trying to then correct this problem, the trader decides that maybe he or she is entering trades too late. So, now, instead of letting the setup complete and then doing the trade, the trader anticipates the trigger, so the trade can be entered earlier; the losses get worse.
With the continued losses, the emotions take over: “What is wrong? Why am I such a pathetic loser? Maybe it’s not my fault; maybe the method just doesn’t really work.”

The problems get worse with each trade, more emotions and more loses -- the trader quits trading. The trader now decides that his or her paper trading results weren’t really adequate to begin real money trading. The trader will go back to paper trading and studying again.
Thoughts that are going through the trader’s mind now: “Maybe I should try different trading methods until I can eliminate those losing trades. Then I will be ready to trade real money again. Really, maybe I should just quit trading altogether -- maybe I am just a loser, and that’s why I can’t trade.”

What should be very apparent from this scenario is that the trader never traded his or her paper trading method plan after transitioning to real money trading. Unfortunately, the trader is unable to realize what he or she has done. Instead emotions first place blame on the method and then on the self for being “such a pathetic loser”. The final result is that the trader quits trading. Yet, if the real underlying reasons for what has happened aren’t accepted and changed, this trader will never be able to trade real money even if his or her paper trading results were to become 100 percent winners, which, of course, is not going to happen.

The trader had a trading method plan, but he or she did not have a trading psychology plan. The trader did not have a way to make the transition from fear and emotion-directed trading to actually trading the method as designed. The trader did not have a plan to objectively access and understand his or her given non-method actions and then define a “setup” for replacing them.

The trading psychology plan must begin with an honest assessment and acceptance of what really happened: The trader never traded the method plan; there is no other blame to be placed or excuses to be made. There is nothing wrong with the trading plan, and, regardless, the trader did not trade it so is unable to make that evaluation. As well, traders cannot internalize trade losses to the point where they associate the losing trading with themselves -- you are not a loser because your trade is a loser.

• Accept that losing will be a normal part of trading. Not only is it impossible to be perfect, it is not an appropriate objective or necessary to be profitable.
  
  
• Replace the focus of winning and losing with the objective of following your plan. In the example scenario, the trader didn’t do this while paper trading; the trader had a specific profitability goal to tell him or her when he or she was prepared to trade real money but did not understand that success would be achieved by how they followed their plan.
  
  
• Remain neutral and non-judgmental toward yourself. If profitable trading is ever going to be possible, this is mandatory. There is no way you are going to be able to trust yourself to manage risk while you are also telling yourself that you are “stupid” or a “pathetic loser” each time you lose or feel that you have done something wrong.
  
  
• Understand that the goal is not to eliminate your emotions; I actually don’t think this is possible. Emotions are always going to enter into trading. Instead, learn to control your emotions rather than having them control you.
  
  
• Accept that emotions are a part of life; they aren’t, by definition, good or bad, and, actually, if you can shift your focus to what your emotions represent, they can be very beneficial. For instance, if I am feeling confused and that causes an emotional response or hesitation, I want to feel that emotion. This emotion becomes a warning to me that I should wait and try to find more chart-market clarity before taking a trade, a very typical occurrence when markets are in congestion.
  
  
• Start slowly.

That last component may be the most important one of your plan. For instance, begin trading real money for an hour at a time, and then assess what you have done, always asking yourself the question: Did I follow my plan, or did I take non-method trades?

Granted, you will not be able to approximate your paper trading results because its was achieved by averaging 15 trades per day. However, not only will this help you further shift your focus from how much money you made to whether you were following your plan. It will also allow you to acclimate to the logistics of real time-real money execution, and the related initial emotions, where all of a sudden the market feels as if it is moving considerably faster. By doing this, you will “build up” to trading your full plan at a pace that won’t cause you to become overwhelmed by the process and immediately push you into avoiding what you had intended to do at the point at which fear and emotion become too strong.

You have a great trading method and trading plan. You have profitably paper traded, and you ARE now ready to start trading real money. Just be sure that you have a trading psychology plan that is as good as your trading method plan and that you realize that neither will be of any use to you without the other.

*Reprinted (and modified) with permission from Barry Lutz of Tactical Trading, LLC (www.tactrade.com)