Trading Tip #11 You Want to be a Trader? Do Not Paper Trade.
There seems to be many programs for paper trading. As Seen On TV “Backtest your strategies.” Almost every on-line trading system has this. Very few strategies work all the time. I address various Trading Styles in Trading Tip #9. Unless you are in a college trading competition, I think paper trading is pointless.
There are many who might not agree with me. Let’s take the past few trading days as an example. On 2/27/2013 the market was up over 200 points . If you were paper trading, you would feel a sense of pride and, I am sure, at some point you would have said to yourself “I would have nailed it today.” Now let’s back track to 2/25/2013 just a few days before when when the market got slammed. A paper trader would not feel like their guts were being ripped out. The feeling of trying to find the right place to sell. The fear, hoping that it would not bounce back in their face. The over-whelming feeling of “when is this market going to stop going down?”
After the rally the past few days, most paper traders would say, “It was no big deal. I would have held on and been right after all.” Bull S*%t! That is not how it works when you are trading your own money.
I have trained so many traders, and I have always told them that the only way to truly learn is to get your feet wet and take some risks. It does not have to be a substantial risk, but risk-taking needs to be a part of the learning process. Let’s look at this example:
A Paper Trader: Garment industry executive by day. For years, this person has been studying to be a trader at night. He saw his friends make a lot of money trading, so he felt he could do the same. He is up for hours at night, reading books and looking at the charts. He is the type of man who walks around like a big shot, with nice cars, a nice house, etc. He only put $6000 fake dollars into his fake account. Someone like that, putting in that amount, should have realized trading was not for him. Because if there is one thing I have learned by watching all the broker training sessions at the Exchange, it would be that everyone was a big shot … until the real money was on the line. So, if you feel that you have to paper trade, at least do it with an amount that will keep your attention span high and maybe get your blood flowing.
If you find yourself only being able to make paper trades, maybe trading is not for you. It is not for everyone, and that is okay. You do not want to trade if you are not ready to handle the mood swings that come along with it. Trust me, on my seriously bad days, I didn’t even like driving home with myself in the car.
Trading is not just about learning the technical analysis, charting, reading blogs, following twitter or watching the financial news networks, etc. I know many highly successful traders that read People magazine on the way to work. The most important issue with trading is being able to understand and deal with the stress and the emotions that are part of ever winning, losing or pass out trades. Simply put – the pain or pleasure one gets from the process and outcome of a trade. Anyone can handle a good day, but recovering after getting your butt kicked as I spoke about in Trading Tip #8 is not as easy as it sounds. It is a process that is learned when real money is on the table.
For those of you just starting out, just trade very small and see what it feels like to be a trader. You are better off losing $50 on a real trade than $500 on a paper trade. It is the only way to really get a feel of being a trader . Trading small will allow you to be in the game, without placing yourself in the position of getting blow out.
Another reason why I am not a fan of paper trading is “paper” traders tend to forget about bad trades. If you are paper trading and the market moves against you, many times you are busy doing other things and are not actually 100% focused on the trade itself. Remember no pain, no gain. That saying also works with learning how to trade.
Yes, the winning trades feel good. You will go out for dinner and say I was paper trading, but if it was real, I would have made a lot of money. Try to pay for dinner with the paper money you made for the day. It won’t work.
So if you’re thinking of trading:
- Open a real account
- Make sure it is with money you are able to afford to lose
- Try some small trades
- As you feel more comfortable increase you size
- Expect to have losing trades (its okay, everyone does)
- Make some trades from both the long and short side
- Realize that markets never just go in one direction
- Understand there is money to be made in a down market
- Take it slow, steady and easy. Do not try to be a hero
- Never think you have figured out the market, when you feel that way, the market has a unique way of reminding you who is boss.
- And, finally, if you need help learning to deal with the emotional trading issues, please add your name to the mailing list below, and I will inform you of the next Greenberg Capital, LLC webinar.