From time to time when I am at a social event, out playing poker, or rooting through the dumpster behind Arby’s, someone will ask me, “what do you do for a living?” I usually respond that I do a “number of things”, one of which is trading stocks.
After that they generally ask me a series of questions about my trading style and how I feel about the market in general. Often they will tell me about their own forays into trading and then say something like this…
“I have been paper trading for about six months now, and I am KILLING IT!!! I am thinking about quitting my job and starting to trade full-time. By the way, where is the local Ferrari dealership?”
Since I like to see people in terrible pain and suffering, I always encourage them to “go for it!” (Just kidding).
I am no fan of paper trading because it gives you an artificial sense of detachment from your trades, both losses as well as wins, since you are not using real money.
Almost every person out there will change their “real money” trading methodology once they experience the euphoria of a winning trade or the depression of a losing one.
Occasionally I will find someone from a very “rules based” background (think engineers, airline pilots, etc) who will actually trade real money the same way that they paper trade, but for vast majority of people, they just can’t.
I have a lot of issues with Alexander Elder, as well as any author whom I suspect makes more money from writing books about trading than actually trading. That being said, I remember reading “Trading For a Living” and thinking the book spent too much time on the psychology of trading.
Being young and foolish, I also remember thinking, “what the hell does all this crap have to do with trading? You buy a stock, if it goes up, you make money, and if it goes down, you lose.”
Needless to say, the point of that book was to try to save the novice trader from blowing their account out before they really began to understand how important emotions, mindset, and pre-conceived perceptions about the market are in their trading success. Those who paper trade can never understand that.
It is like trying to find out what sugar tastes like without actually tasting it. You can read about it, you can talk to friends about it, you can study its molecular structure, but until you actually take some and put it on your tongue, you can never know what it really is all about.
So to that would-be trader I suggest a better alternative, which is to trade with a very small amount of money. Even if you are only risking $50 or $100 dollars on a trade I believe it will tell you more about your abilities in trading than any amount of paper trading.
It will give you “skin in the game” and focus your trading. It also gives you time to build a methodology, which if proven sound over time, can be scaled up as your trading experience and account equity grow.
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