Trading Tips

Peak Performance Trading Tips

Tip# 95

Expertise
(Part V)
by D. R. Barton, Jr.

"The way to develop self-confidence is to do the thing you fear and get a record of successful experiences behind you. Destiny is not a matter of chance, it is a matter of choice; it is not a thing to be waited for, it is a thing to be achieved." ~William Jennings Bryant

Our exploration of the subject of "trading expertise" is in its fifth week For the last four weeks, we've been discussing the concept of expertise as applied to a price discipline in trading. Last week we looked at the importance of practice in your journey toward developing expertise in your chosen price discipline. I left you with the thought that one has to develop a way to practice. I mentioned that when many folks think of "practice trading" they immediately think of "paper trading".

Paper trading involves writing your trades down on paper, but not actually placing the trade in the market. For me and many of the traders that I work with, paper trading is seen as a tool with very limited usefulness. The shortcomings of paper trading are many, but the bottom line is that nearly everyone paper trades well. As one friend says, I've known many paper trading "millionaires" who found a different reality when they put real money into the markets. While execution issues such as commission costs and slippage play a role in differentiating paper trading from real trading, the true distinction comes in the trader's psychology. There's a very real difference between a big profit or loss on paper and that same amount when seen in real dollars.

To illustrate this difference, think about placing a 2" x 4" board on your living room floor. Your goal is to walk across that board without falling off. It's a piece of cake, actually. After successfully traversing it once, you run, skip or dance across. "Pass the blindfold, this is easy!" might be your next statement. Now imagine that same narrow board stretched between the roofs of two buildings - 20 stories above the street. Crossing that very same board takes on a whole new level of complexity. The risk is infinitely higher. It's the difference between a little personal embarrassment (if you step off onto your living room floor) and serious personal injury (or worse) if you fall 20 stories. That gives you an idea about the magnitude of difference between paper trading and real trading. But don't despair! There are some great methods for practicing your price discipline that will not put you or your cash (at least not much of it) in harms way. We'll explore those methods in next week's "Trading Tip".


D. R. Barton, Jr. is a featured speaker at the upcoming Stock Mastery 101.

D. R. Barton, Jr. is a lead instructor for IITM courses. He is the Chief Operating Officer and Risk Manager for the Directional Research and Trading hedge fund group. D. R. has been actively involved in trading, researching and teaching in the markets since 1986. In 1999. D. R. has created extensive and innovative new training products and taught extensively in many investment areas including intra-day trading, swing trading, and cutting edge risk management techniques.

His writing credits include: Safe Strategies for Financial Freedom by Van K. Tharp, D. R. Barton, Jr. and Steve Sjuggerud and cover articles for the trade newsletter Market Mastery where he also serves on the editorial advisory board. In addition, D. R. writes a stock screening newsletter for traders and investors called The 10-Minute Trader.