Paper trading and the transition to real money trading
Paper trading is widely discussed regarding its merits and whether it is valuable to a trader while trying to make the transition to real money trading. One view is that since paper trading is not real, the gains are meaningless and are not an indication of the profitability of real money. An opposing view would claim that paper trading is an important step in the trader’s learning progression, and regardless of whether it is real, if the trader cannot trade paper “adequately” then they will not be able to trade real money.
I started trading in early 1995, with the intention of becoming an options trader; My first trading education was through an OEX options teaching service. In addition to options training, the service included reading “tapes”, business management AND futures trading of the sp500 index; also included in the service was the prevailing attitude that paper trading was for “sissies”.
So I was a new trader, trying to learn and understand completely new concepts and ideas, what was called a trading method AND I was ‘practicing’ with real money, because paper trading was for ‘sissies’. What did I get, besides a huge reduction in my account? I quickly introduced trading psychology and related implications, something else I also knew nothing about. Losing money and a ‘wreck’ of trading psychology, both from losses and from thinking I was too ‘stupid’ to learn how to trade, became a combination that got me out of futures trading and then sadly moved to my options trade. that I had done well before. He just couldn’t take it anymore, somehow he had to start over or leave it forever.
Paper trade views
Please note: the simulator fill prices are not real and will not be possible with real money. Even if this is correct, is it really a problem unless the trader intends to be a scalper, trading for very small profits and therefore every brand is critical? Okay, but shouldn’t a beginning trader be very selective, focusing on learning the method from him and the ‘best’ setups that method provides? This would be my point of view, and in this capacity paper trade execution prices are not an issue.
Consider: operations are carried out without risk. No, there is no financial risk in paper trading, but I haven’t actually met as many profitable paper traders as you might expect. Why would this be the case if being able to trade without risk was such an easy thing to do? Also, what about the risk of self-esteem and an attitude like: how can I be so bad that I can’t even negotiate paper? Risk sentiments like these are probably greater than financial risk sentiments, and if they’re going to arise, you’ll want to find them before you trade real money. Also, even if the issue was just one of financial risk, wouldn’t you want to start with the confidence of knowing that paper trading is profitable? It would be hard to imagine a losing paper trade being able to trade profitably with real money.
Consider: there is no emotion involved with paper trading. I was in our chat room watching a paper trader post his trades for me to give him his opinion, and I noticed that one of the specific setups of his plan hadn’t gone through. When I asked why, the trader told me that they were ahead of schedule and didn’t want to risk those profits. But the gains are not real. How not to take a ‘base’ method setup when trading on paper? Isn’t that the point? Would you agree that if the profits from paper trading could be viewed in this way, it has the ability to become very real and therefore emotional to the trader? I would suggest this is related to paper trading really not being ‘that easy’ and as mentioned above the self esteem risk can be very emotional.
In addition to examples like this, emotions can be added to the paper trading process. Throw out your simulator and then go to a chat room and post all your trades, no ‘you know what’ waiting to see if the trade was profitable before posting it, like several traders I’ve seen. What’s the point, and when do you consider the underlying implications of the “need” to do this? The issue is certainly not whether paper trading is valuable or not, but it is certainly better to find out before trading real money. You must post immediately and without delay, giving your address and entry price, along with subsequent postings of any partial profits and, of course, your exit, which is ultimately the determinant of whether the trade was profitable. There’s no need to comment or answer any questions regarding your trades – just post the details as quickly and in real time as possible AND see if you get any excitement doing it in front of the rest of the room as you go through a series of losses. Do you want to add even more emotions? Go through the same post process, but do it where the rest of the room actually knows the method you’re trading with and what the trades ‘should’ be. You’ll quickly discover just how emotional paper trading can be – it’s actually a very worthwhile exercise for the paper trader.
Paper trade and make it even more profitable
I have two overriding problems with paper trading, but this is with the trader approach, and not paper trading by definition: (1) the trader does paper trading “things” that he couldn’t do with real money ( 2) The trader sees the profitability of paper trading, rather than the competition of paper trading, as the guideline for whether they are ready to start trading with real money.
I have seen far too many paper traders, continuously and consciously, in ‘unplanned’ trades, with a trade size that is larger than they could afford to margin on a live account, let alone accept the risk of loss, by At the same time they keep trading for amounts of risk that you would not accept with real money. Viewing paper trading as a “step” in the progression of learning and transitioning to real money trading, it is critical that the paper trader only trade exactly what and how they would for real money. Don’t allow yourself to turn paper trading into a game, supposedly because there is no risk: the risk of picking up bad habits that you cannot correct is tremendous and will prevent any attempt to trade with real money. This is the time to learn YOUR basic trading setups and make any necessary adjustments to them and their entry and exit time, then earn money trading them; This is NOT the time to turn your simulator into a pinball machine that shoots any ball. that approaches you
There is a problem with focusing on business profitability versus business competition. For starters, profitability puts the focus on the money and not the plan. And what is profitability? If you make 10 trades and win $75, is it profitable? Technically, if you have a net edge, you’re profitable, but what if those same 10 trades had a potential of $1,500 and you only made $75? Is it really profitable? This is what I mean when I think of business competition. Instead of focusing on common metrics like win:loss ratios or win size:loss size, what I’m most concerned about is the win size:potential win size ratio, and I want to maximize this percentage to the extent as possible.
For example, when a trader asks about increasing trade size, taking the attitude that if you can make $100 trading 3 contracts, then you can make $1,000 trading 30 contracts, the first thing I ask is what is your competition ratio: why increase contract size and the corresponding trading risk, if you ‘should’ be able to make more money with a smaller size? This is especially important for the paper trader, where he should not consider mere profitability as an indication of readiness to trade with real money, but consider the competition; For example, he starts trading real money when he has 60-70 percent competition with your paper trades.
So what is your point of view regarding the paper trade?
I never thought I would ever do a penny trade, let alone be able to trade for a living or get involved trying to teach others to trade. Was this simply a function of starting over and trading on paper? Of course it’s too simplistic, however I know it would have certainly changed the beginnings I had while also greatly shortening my learning curve and greatly reducing the pain.
Clearly, I am on the ‘side’ that believes that paper trading is not only beneficial, but also necessary; however, the value received will depend on the merchant’s approach and attitude. Needless to say, paper trading as described is something I have always highly recommended.