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Money-Management Articles >> Paper Trading And The Transition To Real Money Trading Author:
Barry Lutz Paper trading is
widely discussed regarding its merits, and whether it is of value to a
trader as they try to make the transition to real money trader. One
viewpoint is that since paper trading is not real, the profits are
meaningless, and are no indication of real money profitability. An
opposite viewpoint would state that paper trading is an important step in
the trader’s learning progression, and regardless of whether it is real,
if the trader cannot ‘properly’ paper trade, then they will not be able to
real money trade.
I began trading in early 1995, with the intentions of becoming an options
trader; my first trading education was through an oex options teaching
service. Besides options training, the service included ‘tape’ reading,
trade management AND sp500 index futures trading – also included in the
service was the prevalent 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 accomplish, besides a big draw down in my account? I quickly
introduced to trading psychology and the related implications – something
else I also knew nothing about. Losing money and a trading psychology
‘wreck’, both from the losses and thoughts like I was too ‘stupid’ to ever
learn how to trade, became a combination which took me out of futures
trading, and then unfortunately carried over into my options trading which
I had previously been doing well with. I just couldn’t take it any more –
I had to somehow start all over, or just quit for good.
Paper Trading Viewpoints
Consider: simulator fill prices are not real and won’t be attainable with
real money. Even if this is correct, is it really an issue unless the
trader intends to be a scalper, trading for very small profits, and thus
each tick is critical? Granted, but shouldn’t a beginning trader be very
selective, focusing on learning their method and the ‘best’ setups that
method provides? This would be my viewpoint, and in this capacity paper
trading fill prices are not an issue.
Consider: the trades are being done with no risk. No, there isn’t any
financial risk in paper trading, but I actually haven’t met nearly as many
profitable paper traders as one might expect. Why would this be the case
if being able to trade without risk was such an easy thing to do? As well,
what about self-esteem risk, and an attitude like - how can I be so bad
that I can’t even paper trade? The risk feelings like these are probably
greater than that of financial risk, and if they are going to surface, you
would want to encounter them before trading real money. As well, even if
the issue was only one of financial risk – wouldn’t you want to begin with
the confidence of knowing that you were paper trading profitable? It would
be hard to imagine a losing paper trading being able to profitably trade
real money.
Consider: there is no emotion involved with paper trading. I was in our
chat room watching a paper trader post their trades in order for me to
give them feedback, and I noticed that one of their specific plan setups
wasn’t done. When I asked why, the trader told me that they were ahead for
the day and didn’t want to risk those profits. But the profits aren’t real
– how can you not take a ‘base’ method setup when paper trading – isn’t
that the point? Would you be in agreement, that if paper trading profits
could be viewed in this fashion, that it has the ability to become very
real and thus emotional to the trader? I would suggest that this is
related to paper trading really not being ‘so easy’, and as mentioned
above, self-esteem risk can be very emotional.
Click Here To Go
To Part 2
This article was added on: April 16, 2006.
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