Hey guys and girls! Sorry it's been a while since I posted. I've been insanely busy with reading, studying and trying to get my daytrading game in order. This business is extremely time consuming and difficult!
I wanted to talk quickly about something I think is vitally important to anyone who aspires to be a professional trader or even a successful long term investor: paper trading.
What is paper trading? Well, it's trading on paper. It's trading with imaginary money. The reason people do it is that it allows them to learn without losing huge amounts of money during the learning process. I have read several trading books recently, and almost every single one points out that many traders, during their first two years of trading, will spend upwards of $50,000 just learning how to become profitable. While I'm sure this is a true statistic, it's completely unacceptable for me. I don't plan on spending that much. In fact, I don't even plan on spending $10,000. Instead, lately I've been meticulously paper trading, and paper trading everything so that I can build some serious statistics. I have spoken to several professional traders now about the value of paper trading, and they all had pretty much the same opinion: they don't like it. Most of them don't like it because they feel that it removes the emotional aspect from trading which is an incredibly significant factor when trading with real money. While I agree with them, all of them also agreed with my theory that if you can be honest with yourself about what you would really do if you were trading with real money, paper trading can be incredibly valuable.
The key is to be honest with yourself. I document everything. I document what time I bought (to the second), the exact price I could have bought at (based on level 2 bid and ask prices which are the prices you would actually be filled at if you were to buy or sell with real money), the reason for the purchase, what my setup was, what my stop price is, my reward to risk ratio, the number of shares (considering how many I could safely buy based on my true account value), and my targets. I treat these trades exactly as if they were real trades. Most importantly, I document every single mistake and meticulously pick it apart to understand why the trade failed. I even consider commission and ECN fees, and account for market slippage (having an order in at one price but being filled at another).
By doing this I have found that even though I am making mistakes while paper trading, I am starting to see some patterns emerge that I can work to correct. Sure, I could do this with real money, but is it worth it? I am trying to cut down my tuition cost at daytrading university. To keep my head in the game, I am also still making real trades, but only if I am very confident in the setup and have thoroughly backtested it to understand not only how profitable it can be, but how probable it is that the trade will be successful.
Unfortunately if you're an aspiring professional trader, you are going to lose money. It doesn't matter how good you are. You need to be well-funded and you need to be willing to accept the fact that you could bust your account a couple times, even if your account is $10,000, $25,000 or $50,000. You can, however, reduce the likelihood that you will completely bust your account and help yourself to learn while preserving your capital for as long as possible by paper trading and being honest with yourself about your trades. If you are switching from real trading to paper trading because you're having trouble, you should expect to lose money in your paper portfolio too. If you switch from trading with real money to paper trading and suddenly your trading profits go through the roof, you are lying to yourself. As hard as it is to accept this, you need to take a step back and evaluate how useful trading on paper is really going to be for you. In my experience, some people can do it and some people can't. Most people cheat, but if you don't cheat, it can be incredibly valuable.
If you really want to prove your worth and make sure that you're being honest, operate on a system of full disclosure like I do. I post all my trades on public forums for two reasons: first, so that others may benefit from my mistakes and hopefully save themselves some money, and secondly so that I can't lie. I have several professional traders who evaluate these trades on a weekly basis and will call my bluff if they catch me lying. To me it's not worth it to lie. If you're going to paper trade, be honest with yourself, because if you're not you're only hurting yourself. If you find that you're becoming too comfortable with paper trading, take a couple real trades and lose some real money. It's a great teacher. Remember, it is only after you've lost everything that you're free to do anything.
Click these links if you'd like to follow my paper trades and/or my real trades with full disclosure, and please feel free to ask me questions in the comments section here or on the Tradervue website!
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