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4/7/2007

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The Week At A Glance According To The Charts








Transition from Paper to Real Money Trading




Transition from Paper to Real Money Trading -- by Bill Kraft
Copyright 2007, Makin' Hay, Inc., All Rights Reserved

Bill Kraft
Editor
I received a letter to the editor this week that highlights one of the paramount hurdles a trader must cross before becoming successful. Here is the letter:


"Mr. Bill Kraft
I truly enjoy your weekend newsletters they are very informative and try to apply your advice to my trading style. I have been paper trading for about a year now and in the last 2 months my success rate has improved to 70% winning trades. I'm writing to you for advice on transitioning from paper trading to live trading. My fear of risk of losing money has limited my success. Emotions are changing the way I think. I'm not sticking to my trading plan, and I'm exiting my trades too early which I don't do on my paper trades. If you can't control your fear, then you won't have patience. If you have any advice maybe you could write on this in one of your newsletters.

Steve (last name withheld)"

Steve, I want to thank you for your letter and assure you that you are not alone. Steve has done all the right things so far. He has developed and tested a trading plan. Without such a plan, he would have been doomed to failure absent uncanny luck. By paper trading his plan, he has demonstrated unequivocally that it works. In the last 2 months he has had a success rate of 70% which is not shabby by any standard. He has demonstrated patience by sticking to paper trading for a year. In short, Steve has paid his dues. Now he would like to cash in on his efforts, but emotion has hurt his effectiveness.

Paper trading has great value and, in my view, is a necessary foundation to real money trading. As Steve (and almost everyone else who has ever paper traded) has learned, though, it is not the same as real money trading. Once we put our hard earned cash at risk, fear of loss rears its head and can take control if we let it. In order to overcome this hurdle, let's see what paper trading really does for us.

When we paper trade we are learning how to implement a strategy. We learn the "ins" and "outs" of entry and exits and we test our plan. Over time, we come to see whether our plan succeeds or not. We can see where we make mistakes and learn from them. As time goes on, and we develop and use a successful plan, we can see that we can do it. We have proved to ourselves that we can do it -- we can trade profitably! That realization brings a justifiably higher level of confidence with it. Now we are ready to trade with real money. But, folks, it just isn't the same. When we were paper trading, we had nothing to lose. Now, with cash on the line the "pucker factor" arises.

Instead of doing what we were doing so successfully on paper, we change things. As Steve wrote: "I'm not sticking to my trading plan." It is easy to say: "Why not, Steve, it was working quite well, wasn't it?" But that does not really help. Steve and the rest of us know that is the logical truth, but trading encompasses the danger of so much emotional reaction that is hard to control. One answer to the dilema is to realize that the vast amount of traders in the retail market are trading on emotion and losing. If you can be one of those who separates from the emotional crowd and sticks to a plan that you already know is successful, you have increased your odds of being a winner dramatically.

Another important factor that I have found helps overcome emotion is to set your exit plan before you ever enter a trade. I suggest, for example, that it not be a target since once a target is hit what is to say that the move will not continue. Instead, as a target is approached, why not just tighten stops. If the target is reached and the move backs off, you will automatically be out. If the move goes on past the target, you will not have cut your profits.

As time goes on, I'll try to address the critically important issues raised by Steve's letter. For now, let me congratulate him on developing such a successful plan and suggest that he answered his own question. He recognizes he is exiting too early and he recognizes he is not following his already proven plan. Maybe it would be a good idea to take the cash off the table for another month and paper trade some more to satisfy himself that the plan does work, or, if he still wants to trade cash, make small equal dollar risk trades and follow the plan.

I want to thank Steve, again, for writing. Almost all of us who have become successful traders have gone through what he is going through now. The emotional barrier is extremely difficult to overcome. Developing the discipline to follow a proven plan is necessary and definitely worth the effort, but is difficult to achieve.

Good Trading!
Bill Kraft

Mr. Kraft's past articles are posted on our website for your review.



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Company Profile
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Chart by StockCharts.com



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Company Profile
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TREND TRADER -- by Bill Kraft
Trend trading as we try to practice it is a form of momentum trading. We prefer to try to capture profit out of the middle of the trend rather than try to catch reversal at bottoms and tops.

Chart by StockCharts.com




SMOD (SMART Modular Technologies Inc.)
Company Profile
This stock brought me almost 1% per day before commission in a nice 3 day trade. That happened a little faster than a lot of my trades, but I won't complain.



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$10 TRADER -- by Bill Kraft
We really enjoy trading stocks that are $10 and under. Often they provide the chance to enjoy high percentage gains and, of course, at worst, the risk is limited to what we paid for the stock.

Chart by StockCharts.com



BVX (Bovie Medical Corp.)
Company Profile
BVX has just come off a double bottom after announcing a record net earnings and earnings per share for fiscal 2006 and their 4th quarter. The biggest drawback I see right now is the dangerously low volume traded. Thursday, only about 36,500 shares traded hands and that kind of volume can lead to some really volatile movement. I will look at this one as a potentially high risk maybe high reward candidate next week.


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ABM (ABM Industries, Inc.)
Company Profile
Our Dividend Investor members closed another winning trade this week. We had purchased ABM Industries as a "trade position" on March 20 for $26.00 per share and we sold ABM on Thursday at $26.78 per share for a 3% gain in less than 3 weeks. We also entered a new position in United Parcel Service at $69.80 this week.

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Chart by StockCharts.com


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Company Profile



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