Paper Trading and the Taste of Sugar

Because I’ve been involved in the market for so long, people often ask me about my trading style and how I feel about the market in general.  Occasionally, they will tell me about their own forays into trading and some will even say something like this…

“I have been paper trading for about six months now, and I am killing it!  I’m 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 suffer, I always encourage them to go for it! (jk).

I am not a fan of paper trading because without real money on the line you get an artificial sense of detachment from your trades, both wins, and losses.

Almost everyone will change their paper trading methodology once they experience the euphoria of a winning trade or the depression from a losing one.

Sometimes I’ll meet a person that comes from a rules-based background (think engineers, airline pilots, etc) who will actually trade real money the same way that they paper trade, but for the majority of people, they just can’t.

Though I have issues with Alexander Elder – as well as any author whom I suspect makes more money from writing books about trading than actually trading – I remember reading his book, Trading for a Living and thinking that he spent too much time on the psychology of trading.

Being young and foolish, I thought, “what the hell does all this crap have to do with trading?  You buy a stock, if it goes up, you make money. If it goes down, you lose.”

Needless to say, the point of his book was to try to save the novice trader from blowing their account out before they really began to understand how emotions, mindset, and pre-conceived perceptions about the market can affect their trading success.  Those who paper trade can never understand that.

It’s like trying to understand 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 those would-be traders, 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 ability to trade than any amount of paper trading will.

It will give you “skin in the game” and focus your trading.  It will also give you time to build a sound method, which if proven profitable, can be scaled up as your trading experience and account equity grow.

For more (and better) info on the psychology of trading, try Trading In The Zone and The Disciplined Trader by Mark Douglas.

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