Paper Trading… Should You Do It?

| November 30, 2009 | 0 Comments

Sometimes in life we do things that are a complete waste of time.  I’m sure you’ve done some of these…

Like washing your car, only to have it rain the following day…

Or planting a garden early in the spring, only to see it wiped out by freezing temperatures the following week…

Or even driving into a big city without a map, thinking you can find where you’re going… (I always get lost.)

We’ve all done it.  Some activity that seems worthwhile, but turns out to be a waste of time.

In trading, many beginning traders try their hand at paper trading.  This might seem like a good idea, but I think it’s a waste of time.

Paper trading is “pretending” to make trades, managing them as if you were actually putting real money in the trade.  Many proponents say it’s a great way to get involved in the markets without taking any risk.

I say you’re better served by fishing in a mud puddle.

The problem… it’s very easy to ‘massage’ your results.  You can always change your paper trading results by looking back at the chart and saying, “I would have done this and I could have done that.”  You can alter your past decisions to benefit the (paper) bottom line.

I don’t know anyone who lost money paper trading!

Paper trading results are always outstanding and often give a beginning trader an unrealistic dose of confidence.  They of course take too much risk when they start out with real money.  Excess risk then becomes big losses.

It’s virtually impossible to get the same results in the real world.  You see, trading is psychologically different when real money is on the line.

Part of the problem is new traders don’t want to lose real money.  They’ll manage real money trades very differently.  They’ll put stops too tight, take profits too early.

They don’t understand sometimes taking small losses is a part of trading.  It’s impossible to be a profitable trader and never have a loss.

Experienced traders consider trading losses to be ‘overhead’… the cost of running a trading business.

The key is to keep ‘overhead’ low.  That’s why we cut losing trades so quickly.

Paper trading won’t teach you this valuable lesson.

So what should new traders do?

The answer is simple.

You should trade with real money.  But only risk very small amounts.  You’ll have real money on the line and you can really learn about trading.

You’ll notice emotions tugging at you.  You’ll realize the big debate all traders have… is now the time to buy or sell?  It’s great practice for controlling your emotions.

You also won’t be able to “fib” your results.

You can consider any small losses the cost of your education… And if you do start making money right away… the more the better!

You’ll eventually develop a system, learn to control your emotions, and find an edge.  Then you can start gradually risking more money on every trade.

You’ll learn lessons with real money that you can’t learn from paper trading.

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Category: Technical Analysis

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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