A Trader’s Progress

What does it take to move from paper trading to using real money?

Paper trading serves a purpose. It give the trader a chance to go through the motions and to gain experience

    –Entering orders, including understanding what constitutes a suitable trade

    –Managing risk, including when to hold and when to exit

    –Making profitable exits, learning when it pays to leave money on the table and eliminate the risk of holding

    –Learning to use the broker’s trading platform

One objection to paper trading is that no real money is on the line and that the undisciplined trader may not treat the position as if it were real. When that happens the trader loses out on the opportunity to get a feel for risk management and the important decisions that are involved. I have to agree that this can be a problem for some traders. However, once you can handle the order-entry system and understand the strategy, it does not pay to remain in paper-trading mode much longer, unless you are making specific trade experiments (to learn from the experience).

The one-lot

I know that trading one-lots may seem to be a chicken’s way of trading. However, be assured that it is not. Whatever your bankroll, it is important to trade small position size when getting started. For many beginners, that size is a single-lot. If you have more money (say 6 figures) to deposit into an account, then it’s okay to begin trading with 2- or 3-lots. But there is no need to do any more until you have a feel for ‘real-world action.’

Discipline

Suggestion: Until you know for a fact – because you have proven that you can take appropriate action when necessary (when real cash is at risk) – that you will not be stubborn and that you will reduce risk (or exit the position) when risk has moved beyond a level where you are comfortable taking that risk – do not increase position size.

If you decide that an appropriate number of contracts for a given strategy is 10 (for example), it is best to move from 1- to 2-lots for a month or two. Next move to 3- or 4-lots. Do not go all the way to your desired position size immediately. Some people who have trading experience (but who are new to options) will be able to move to full size quickly. However, new traders may not realize how frightened they can get (it truly depends on your own personality), and there is no reason to subject yourself to an uncomfortable risk just because you lack patience.

You have the rest of your lifetime to trade. My advice is to take steps to get where you are going. Try to get out of paper trading and move into the world where real money can be earned or lost. But have the patience to increase position size slowly.

Good trading.

{{{gold}}}

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