Thoughts on Paper Trading (and What Sugar Tastes Like)

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 in terrible pain and suffering, I always encourage them to go for it! (Jk).

I am not a fan of paper trading because since you are not using real money, it gives you an artificial sense of detachment from your trades, both wins and losses.

Almost every person out there will change their paper trading methodology once they experience the euphoria of a winning trade or the depression of a losing one.

Sometimes I will find a person with 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 his book, “Trading For a Living” and thinking that he 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 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 methodology, which if proven sound over time, 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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  • James @tradinglife

    In principle I completely agree with Brian. Lately though my opinion on this has been morphing.

    I am a strong believer in “muscle memory”. Baseball players play catch for thousands of hours outside of game day. Swimmers practice their turns and their starts repeatedly outside of competition. And lawyers argue even when they have no case at trial.

    All of these individuals hone their skills in an environment without consequence and without emotion. They build a “muscle memory” of success before the bright lights come on, before the gun, and before the gavel hits the desk.

    As traders there are few methods for honing skills outside of market hours. It is always game day for us. Perhaps we would be well advised to remove the consequences, and with them the emotion, in order to create muscle memory.

    I’m still working this one out…

  • Ethan

    I agree (from experience) there is no way to replicate the raw nature of trading real money. However, I found it difficult to juggle the day job, family, house and yard work, and downtime alongside managing a portfolio. I never lost a lot of money per trade because I under traded and used really tight stops, but also never made money. It was probably due to a semi-conscious realization of my limitations. However, I did succumb to stress and anxiety that spilled into my personal life. Too much on my plate. As a result, I gave management over to a trusted advisor. Now (because I found trading compelling and challenging) I am attempting to use paper trading to continue developing skill for an eventual return to real money, but not until I can create the discipline and time management to follow my trade plan and my daily life outside trading concurrently. Without wrecking both. My goal is 9 months to a year of consistency with a secondary goal of trading equanimity. Using Zen meditation for that second goal. Since I got a good glimpse of the rush of greed, the angst of fear, and the pang of uncertainty I use that memory to provide a reality check on my return. Love your blog, thanks.

    • Part of what is going to ultimately make you successful Ethan is that you actually put some serious thought into the processes that you are engaging in when it comes to trading. You would be amazed at how many traders don’t. Thanks for reading the blog.

  • tim

    I do agree that paper trading can set a false sense of security in early trading. When I started trading last year, I just jumped in, I lost some money, made some money and went through all the emotional roller coasters. That did make me a better trader then paper trading could of ever done. BUT! Now, I am paper trading to refine my strategy. I know the basics of what not to do, and what to do. Paper trading now allows me to take on numerous trades, where I wouldn’t have the necessary capital to take in real trading. This has allowed me to build on my strategy and make it more profitable before I go back to real trading. I feel as if I played a season of baseball and now it’s the offseason where I realize my weakness is at the plate, so I’m spending my time in the cages practicing.

    • I think you have struck a good balance Tim. You got your feet wet and learned what it all was about, and then were able to use paper trading to do some “fine tuning”.

  • The first book I ever read that had anything to do with the the market was “Trading for a Living”. For some reason I took all the first chapters that deal with psychology seriously. Guess it is just a personality trait of mine to be cautious. I must have read at least 10 trading books before ever opening my first account.

    As far as paper trading goes, I think it depends on what type of trader you want to be. I think it is more likely to help a prospective swing/position trader than an active day trader. For a trader that doesn’t watch the market trade live and is only entering orders the night before, I think paper trading is a great option before risking actual money. For someone that wants to actively day trade, I think the disconnect from emotions of having real money on the line makes the process almost useless. Not to mention, calculating slippage gets even harder to do realistically.

    I agree that your advice about trading a small account, and risking only a small amount per trade is probably the best for an active day trader just getting started. Money means different things to different people though. To some, $50 to $100 is a lot, while to others, it is pocket change. I think you at least need to risk enough where a loss still hurts a little. Otherwise, it might be hard to build discipline.

    Optimally, the best traders trade without watching p/l. They only manage their trade following their plan, only adapting their plan based on evidence provided from the market itself. I know a few excellent traders, and even they haven’t completely mastered this ability.


    • Your point about the best traders trading without watching the P/L is so spot on. It allows you to focus on the perfecting the process, and if you do that, the money comes naturally. I am loathe to make poker/trading analogies (although I seem to do it a lot), because I don’t like the gambling/trading implication, but I remember Phil Ivey making a great point that applies to trading. He said that when you are in a big hand, you can’t look at the money in the middle and think “that’s a Ferrari in there.” You have to divorce yourself from the money concept and play the hand in the correct way regardless of the pot. Perhaps that is why I suck at poker…

      Thanks for the input Ken.

  • I will share a part of my chapter from StockTwits Edge.

    “I paper-traded while I learned anything and everything I could about the fundamental nature of the equities market and how to decipher the technical data left in its wake. Now, there are a lot of naysayers when it comes to the value of paper-trading. Some casually dismiss it as a potentially useful tool because it somehow can’t evoke the “real” emotion of trading; that you need to feel the risk. That’s just silly. As is the idea that emotion somehow even has a place in a successful trading strategy. It doesn’t. In fact,
    emotion is probably the ultimate culprit for 99% of the accounts that blow up. And
    therein lies the rub. Trading is an intensely emotional activity. After blowing up
    my first account, I stuck to paper trading for a full year.

    What I discovered through that experience was that my single greatest
    obstacle to pulling off successful trades wasn’t my interpretation of the technical
    data I was relying on for the setup; it was the constant bombardment of all kinds of
    emotional impulses we all experience everyday as human beings. And giving in to
    emotions tends to lead to some rationalization or another for deviating from the
    original trade plan. In reality, the most successful traders operate completely
    devoid of emotion, like machines. Why? They are machines. Paper-trading offers
    an effective risk-free method for humans to practice trading like a machine and
    temper the natural tendency to let emotions interfere. I highly recommend it as a
    prerequisite for first time traders and any trader who feels like they’ve maybe lost
    their edge. For me personally, as a result of the foundation I laid with my paper
    trading, I now pull the trigger on a trade knowing exactly where I want to sell my
    shares and where my stop is. And more often than not, my trade orders are entered in advance and executed automatically, in an effort to even further remove the
    temptation of emotional interference. Plan your trade. Trade your plan.”

    • By the way, for those who have not bought The Stock Twits Edge, it is a great book, and Ron’s chapter is invaluable. He is a must follow on StockTwits.

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Brian C. Lund

Brian C. Lund

Great father. Good friend. Decent trader/writer. Lacking husband. Solid drummer. Sometimes funny. Often A-hole. Terrible poker player. Too smart. Punk rock. Work in an ice cream shop.

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