Anyone who has read very much of this blog knows that I recommend extensive paper trading on a demo account before you trade a live account.  As a matter of fact, my exact advise is to be able to put together 5 days of consistent profits before you even consider tinkering with real money.  I think this is a realistic strategy for learning trading.

You will also find that I recommend some serious reading of some of the classic authors of investment techniques and theory.   I think it is important to understand the underpinnings of trading and have a well thought out philosophy on how the market functions.   On a humorous note, there are so many different perspectives on market theory that you are bound to find one that resonates with your own particular thinking.

I am a chaos theory guy.   You don’t have to be a chaos theory guy to be successful in your trading endeavor, but you ought have some philosophical underpinning to your actual trading style.

Which brings me to the point of this post, and that is the transition from paper trading a demo account to trading an account with real money.  You would think it would be the same…ah, erm…it is the same, at least the technique should stay the same.

But, it doesn’t.

Perfectly normal, intelligent people go absolutely brain dead when real money is involved.  I cannot explain this phenomena, I can’t even describe why it happens…but it does happen in an alarming number of cases and sometimes in a highly catastrophic manner.

Is it greed?

Is it fear?

Does real money make people trade different?    The answer, at least in many cases and in the early part of a traders career, is unequivocally YES.   I warn people of this and they vehemently deny that THEY could succumb to this sort of silly stupidity.    A very good friend, who I personally helped in his emini training and was absolutely gifted when we traded together, (he on paper, me with a real account) started trading and promptly lost 25,000 dollars in two days.  I had instructed, and he had always followed, the strategy of trading one of two contracts, and to use tight stops, when traded.  Boom, 25 grand disappeared as if we had never spoken.

When I asked him what went wrong, he was unable to explain his dilemma.  “I lost my mind”, he said.

And I have seem it happen so many times I felt it necessary to forewarn new traders, the transition from paper to cash is a quantum leap.  Be extra conservative, if anything.  Use the technique you perfected on paper and don’t overtrade or mismanage your money.

Okay, ‘nuf said…but don’t say I did not warn you.