Paper Trading is the efficient way to gain experience.
Paper Trading: It’s often said how difficult it is to see the forest for all the trees. That makes sense in the business world where details obscure the big picture, the purpose, the company goal. Nowhere is that more true than in the stock market with the multitudes of indicators, trading rules, charts, patterns, strategies, order types, commissions, entries, exits, risk management, etc. What is the real heart-beat of the market?
How can a beginner hope to break the code and become confident in his/her attempts to master this complex effort? We discussed in an earlier Guideline how a child first masters the bicycle. Training wheels and a loving mentor provide the necessary support, which quickly becomes second nature to the child. And as they say, you never forget how to ride a bike! The same should be said of our use of Paper Trading.
Each element in the world of trading can be mastered, one at a time, until it is all second nature. Second nature means it is natural, just like riding the bike or any of the other multitude of tasks we handle every day. But every task was mastered only after repeated efforts, with false starts, grins, hiccups, and even an occasional bruise. Trading is no different, requiring many trials, many attempts, and repetition to capture the meaning, the reason for each task. We encourage paper trading as the training wheels to shorten the learning curve from many months to many weeks to many days… Let’s examine this premise in today’s Guideline.
The Paper Trader does not trade on paper anymore, with the computer serving a much better platform. But the ease with which the PC gathers and analyzes data does not minimize the importance and critical purpose of the task. It lets us do a better job.
Paper Trading, also called “virtual stock trading,” is a simulated process where budding-traders can ‘practice’ investing without committing real money. It combines imaginary money with investment positions that behave the same was as real markets. Many brokerage houses provide “virtual” trading options at no cost for simulated trading.
This is a very attractive feature, where a trader can create several different positions at the same time and watch how performance compares. What a great tool allowing the trader to try different strategies and plans to find the best fit.
Many in the industry vehemently oppose paper trading since it is not real, without the emotion of having personal money on the line. Comments such as this:
“Why is it that when I hit a golf ball for fun it looks as big as a softball but put a wager on the hole and the ball is reduces to a pebble? Everything gets more intense when it’s for real. That’s why I’m so against and afraid of paper trading. It’s not just a harmless activity that prepares you for the real thing. It’s actually a harmful activity that gives you a false sense of security.”
Another commentator mentioned, “I have never met a losing paper-trader.”
Granted, it is an activity without emotion, but does that mean a musician should only play in Carnegie Hall before any lessons are learned elsewhere? The emotion of real trades and real losses will knock us down at times. But this will strengthen our resolve, built upon repeated lessons learned earlier.
I’ve noticed those who are so against paper trading have already “got it,” with experience that just doesn’t need further learning. That’s okay, but let’s learn to walk before we run. Don Worden (TC2000) used to tell us to write out a check to our favorite charity and mail it when we have a loss in our paper trading. My wife and I have found a similar solution shown with the glass jars below:
We have an agreement whenever I paper-trade or do actual trades:
I place the amount of what the trading commission would be on any losing trade in the left Money Jar and that for winning trades in the right. With what I’ve learned, my jar has more money! I’m now winning more than I lose.
Fig. 1 Money Jars with “Losing Paper-trade” commissions.
My wife gets the money in the left jar. It hurts to fail a paper-trade!
I knew a grocery store manager several years ago who wanted to learn to trade. He paper-traded for a full year before investing a cent. He’s now a full- time trader.
Another testimonial about paper trading (TC2000):
“Love your program. It’s made me a ton of money and saved my portfolio from extinction. I rarely make bad trades any longer (touch wood) except for my own stupidity in forcing a chart and, more often, circumventing my predetermined price target for that “extra bit” of profit. You’ve solved my mechanical problems and I just need to work on my psychology. You provided the tool to solve my mechanical problems, I supplied the hours of studying magazines and books and reading 300 charts every night and doing well over 1000 paper trades per year.”
This last testimonial punches up the biggest issue we all face. We can have the most error-proof trading plan in existence, but unless we free ourselves from our own ego, greed and terror of losing, we can’t pull the trigger (when we should)! We need an assurance that our plan is based on sound principles we have personally tested, be it through paper-trades or actual money on the line. In other words, we need some experience, some emotional involvement. So go out there and get it!
“Triumph is just “Umph” added to TRY!”
In a word – INSIGHT!