The Importance of
Paper Trading
On occasion, new and
veteran traders alike come to me to ask about the importance of paper trading.
A little bit of probing often tells me that they have never actually paper
traded before. I normally encourage them to go for it, but they nearly always
refuse – in their minds, the Ultimate Goal of Trading in the equity or
Commodities markets is to Earn And Keep a Lot of Money, and trading a live
account is the Sure-Fire Way to do this over “pointless” paper trading.
You might do a
spit-take after You have read this, but it is possible to earn more cash by
beginning with just paper trading. In this article, You will read just How
Important Paper Trading actually is, and how it can help Earn You a lot of
Sweet, Sweet green in the future.
Please take note that
in modern terminology, “paper trading” is used to broadly label any type of a
system’s test run. These types of system test can include demo trading, back
testing, forward testing, and etcetera.
Mind
Over Matter?
As You enter the
trading game for the first time, and when You are still learning the ropes, ask
Yourself this – what is more Important: the technical knowledge/aspect
(technical analysis and fundamental analysis) or the trading psychology/aspect?
Most people would say
that both the technical analysis and the fundamental
analysis are Important. Conversely, a few people believe the opposite – that
learning the psychological aspect is essential.
Each group is right –
both of them are vital, because a trader cannot operate without understanding
them both.
Despite this though,
many traders still struggle in becoming Successful – it may be because many do
not know how to strike a balance between the two.
If You wish to know
how to walk the fine line, read onwards.
The
Technical Aspect
Unfortunately, as
mentioned above, most traders do not bother with paper trading, as they want to
dive straight into live trading. These types of people often have a “learn by
practice” approach, which is very risky because of the amount of money involved
in live trading.
While practicing the
technical aspect is essential, You do not have to live trade in order learn –
paper trading allows You to practice with Minimal Risk. If You make a mistake,
the consequences would be far less severe than that of a live trade gone wrong.
If You do not Agree
with this perspective, You are most probably thinking that the traders who do
not trade live money do not understand or grow to understand the emotions and
psychology involved with trading – the aptly named psychological aspect.
BINGO!
Newcomers, the Best
Way to learn and understand the technical aspect is to Stop Worrying about how
You will feel during and after the trade. Keep Your focus narrowed on learning
the technical aspect of Software , until You’ve become proficient at it – push
Your feelings and emotions to the side. My advice is to use Minimum 15 Days For
Paper Trading. – it is the Best Way for Winning Trades.
There is a potentially
costly trap that many New traders often fall into – they hypocritically say
that learning the technical aspect is vital, yet at the same time use live
trading to try and understand the psychology aspect/their own emotions.
It is risky –very
risky and most
ill-advised– but possible to do this. Unfortunately, time has shown that many
an over confident trader have failed to learn both simultaneously – emotions
conflict and interfere with rational choices. When this occurs, the new trader
is confused and unable to understand why the trade failed – was it because of
the psychology aspect interfering, or was it because their system was flawed
and problematic?
In addition, they can
also end up breaking their own trading rules, because of the influence of
unchecked emotions impacting their decision-making. By doing this, the trader
will not be able to tell if their system is functional and Profitable, through
lack of sample-trade examples.
The end result is not
only they have compromised their system beliefs, but also their self-confidence
and any positive feelings they had.
And so, like a dog
chasing its own tail, they end up going around and around and around….
The
Psychological Aspect
The psychological
aspect is very Important, too – though to be perfectly frank, whilst learning
and understanding trading psychology is more Important than learning and
understanding the technical aspect, it is very hard to become proficient in it
if You do not have a firm grasp on the technical side of things.
Confused?
A few of You might be
imitating chimps right now, scratching Your scalps in confusion. I firmly
believe that the psychological aspect is one of the key elements, in Your
trading career. Most people, sadly enough, cannot understand and appreciate
trading psychology, unless they’re a current or a former-trader.
It’s all like a particularly
daunting amusement park ride – when You get on, You feel and embrace the
thrill, the rush, the feelings of rising and falling…
But underneath that
Fun lies all the mechanical work: the system itself. Before Your ride (Your
trading analogue being the live trading account) could have even be built, a
sound engineering plan had to have been designed beforehand (trading analogue:
Your trading plan), with Safety Features (trading analogue: risk management)
Unfortunately for
them, many foolish traders want to build their ride without having a solid,
hardy design, which then proceeds to blow up in their faces.
It’s quite the
problem, no?
Paper
Trading – a Safer Answer
Now You Can Understand
why paper trading is both Safer and Very Important. Your goal should be to
separate the technical aspect from the psychological aspect; to control and
understand them both without either influencing the other.
There is also the fact
that trading for real money is quite the emotional ride – it’s a resource that
can either make Your career or ruin it. Think of it all in another way: if You
knew nothing about handling explosives, would You jump straight into being a
demolition expert? If You (sanely!) agree that You would not, then why would
You do the same thing with real money?
When I try to explain
all of this to my fellow traders, they typically ignore my advice because of
their pride and ego, and they often try to rationalise their course of action –
even when something at the back of their mind is screaming at them that paper
trading is the right way to go.
I’ve been there
myself, trust me – even I struggled to return to paper trading, after thinking
it all through!
Below are some helpful
suggestions:
- Test Systems First by using Paper Trading
When You want to test
out a New Trading System or when You Wish to add one into Your portfolio,
always paper trade test them First – keep tweaking and altering it until its
desired results are consistent.
A fraction of people
will find this difficult, because they don’t really pay any attention to trades
that don’t risk any real money. This is only Ttrue, however, if they do not set
a viable target or goal (such as a Dozen Winning Trades or a certain percentage
gain) before they’re slid over to a live trading account. This will all also
Act As Encouragement and Positive Reinforcement for the trader in question.
- Create a Second, Smaller Account
A good alternative to
reducing Your trading account is to transfer a small amount of money to a
newer, smaller account – good brokers can usually and easily handle their
clients having two or more active trading accounts.
Once the secondary or
sub-account has been established, use it as a test-bed for trade systems that
are either new or just barely profitable. You can then experiment to make them
more effective, as well as allowing You to trade with a greatly reduced risk
factor (compared to the risk factor You would have had, if You had used Your
main account, instead).
Remember, do not
implement any new systems to Your main account until they are Consistently
Profitable!
Finishing
Up…
Now You can understand
why it’s so Easy for New Traders to become confused in regards to handling
their trading systems (the technical) and their feelings (the psychological).
This is one of the greatest obstacles that a trader, of any experience, must
Claim Victory over.
These two aspects must
be separated and managed independently of the other, lest conflict and
consequences occur. By paper/demo trading, this can be accomplished, allowing
those traders who practiced it in the past to Become More Successful than those
who just “dived right on in”.
WHAT EVER YOU EARN FROM MY CALLS PLEASE GIVE 10% PROFIT'S FOOD TO COWS AND DOGS HELP THM GOD WILL HELP YOU-!!!
