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Money-Management Articles >> Paper Trading And The Transition To Real Money Trading Author:
Barry Lutz
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2 Besides examples like this,
emotions can be added to the paper trading process. Throw away your
simulator, and then go into a chat room and post all of your trades – no
‘youknowwhating’ around where you wait to see if the trade was profitable
before you post it, like a number of traders that I have seen. What’s the
point, and when you consider the underlying implications of ‘needing’ to
do this – the issue certainly isn’t about whether paper trading is of
value or not, but certainly best to find out before trading real money.
You must post immediately and without lag, giving your direction and entry
price, along with subsequent posts of any partial profits, and of course
your exit, which ultimately is the determinant of whether the trade was
profitable. There is no need to make any comments, or answer any questions
regarding your trades – simply post the particulars as fast and real time
as possible AND see if you feel any emotions doing this in front of the
rest of the room while you go through a series of losses. Do you want to
add even more emotions? Go through the same posting process, but do so
where the rest of the room actually knows the method that you are trading,
and what the trades ‘should’ be. You will quickly find out just how
emotional paper trading can be – actually a very valuable exercise for the
paper trader to do.
Paper Trading And Making It Further Beneficial
I have two predominant problems with paper trading, but this is with the
trader’s approach, and not with paper trading by definition: (1) the
trader does ‘things’ paper trading that they would-could not do with real
money (2) the trader views paper trading profitability, instead of paper
trading proficiency, as the guideline of whether they are ready to begin
trading real money.
I have seen too many paper traders, continuously and knowingly, over trade
‘non-plan’ trades, with trading size that is greater than they could
afford the margin for in a real account – let alone accept the risk of
loss, while also holding trades for risk amounts that they would not
accept with real money. Viewing paper trading as a ‘step’ in the learning
progression and transition to real money trading, it is critical that the
paper trader only trades exactly what, and how they would trade with real
money. Don’t allow yourself to turn paper trading into a game, supposedly
because there is no risk – the risk of making bad habits that you can’t
correct is tremendous, and will circumvent any attempt to trade real
money. This is the time to learn YOUR basic trading setups, and make
necessary adjustments to them and your entry-exit timing, in order to then
make money trading them – this is NOT the time to turn your simulator into
a pinball machine flipping at any ball that comes near you.
There is a problem with focusing on trading profitability -vs- trading
proficiency. To begin with, profitability places the focus on money
instead of on plan. And what is profitability – if you take 10 trades and
make $75 are you profitable? Technically, if you are net ahead you are
profitable, but what if those same 10 trades had a potential of $1,500,
and you only made $75 – are you really profitable? This is what I am
referring to when I think of trading proficiency. Instead of focusing on
the common metrics, such as win:loss or win size:loss size ratios, I am
most concerned with the win size:potential win size ratio, and want to
maximize this percentage to the extent that is possible. For instance,
when a trader asks about adding trading size, taking the attitude that if
they can make $100 trading 3 contracts, then they can make $1,000 by
trading 30 contracts, the first thing I ask them is what is their
proficiency ratio – why increase contract size and the corresponding
trading risk, if you ‘should’ be able to make more money from smaller
size? This is especially important for the paper trader, where they should
not regard simple profitability as an indication of readiness to trade
real money, but consider proficiency – for instance, begin trading real
money when you are 60-70 percent proficient with your paper trades.
So What Is Your Viewpoint Regarding Paper Trading?
I never thought that I would ever make a dime trading, let alone be able
to trade for a living or become involved with trying to teach others to
trade – was this simply a function of starting over and paper trading?
Granted that is too simplistic, however, I do know that it would have
certainly changed the beginnings that I had, while very much shortening my
learning curve, and reducing a lot of pain.
Clearly, I am on the ‘side’ that believes that paper trading is not only
beneficial, but that paper trading is also necessary – however the value
received will be dependant upon the trader’s approach and attitude.
Needless to say, paper trading as described is something that I have
always strongly recommended.
This article was added on: April 16, 2006.
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