As far as I can tell, most experienced traders recommend paper trading as a way to test a strategy and learn about market behaviour before risking any hard-earned cash. They also advise to study hard and read loads of books before doing anything. Obviously, that’s all very sensible.
However, is it right for me?
When it comes to trading styles and strategies many experienced traders will tell you that these have to suit your personality. You cannot just copy somebody else’s system. So, why is it that there appears to be only one way of learning? Study, study, study until it comes out of your ears, then paper trade and study more, and if you’re still with it, enter the real markets and keep studying.
I don’t doubt for a minute that trading is a lifelong learning exercise. That’s one of the aspects that attract me to it. However, we already know from school how we learn best – some love devouring books, others prefer a practical approach and so on.
When I got interested in stock trading, I made sure to know some essentials; I mean, total basics of chart reading. That was all very interesting, but I didn’t even know how to open a trading account. So, to see whether the whole thing is worth my while, I had to try it out for real. I had to go through the process. I knew I’d lose some money and accepted this fact. Obviously, I was hoping to keep the amount minimal. That didn’t quite work as hoped due to my impatience, but I had put a rule in place to make myself stop trading when I hit a threshold. In parallel, I also started paper trading to limit the risk to my account, but still practise chart reading.
People who are adamant that newbies should not enter the markets are well-meaning and want to spare us the pain of losing cash. However, there are important lessons in that pain which paper trading just won’t teach me.
At the beginning, I was slightly nervous about taking out a trade on paper. Now, it doesn’t mean anything much emotionally. Of course, I don’t enjoy losing on a paper trade, but it’s only numbers in a spreadsheet. Just like for real trades, I take notes along the fake trade such as reasons for entry or exit, emotions and thoughts. It’s an academic exercise. Nothing more and nothing less.
Had I just studied on and on without any market exposure, I would have assumed for way too long that I will be a day trader – my initial idea. Trying it out for real has demonstrated that this is way too nerve-wrecking for me and nearly impossible to reconcile with my job and other interests.
There are loads of other observations – discoveries even – I have made about myself by trading for real. A bit of a costly process, yes, but such valuable insights!
Don’t get me wrong, paper trading absolutely has its uses. They will differ between people and depend on one’s circumstances. Currently, there are four reasons for me to paper trade alongside real trading:
- to test a new indicator or strategy
- to take out a trade I’m not sure about because the signals don’t look quite right, but I want to make myself keep an eye on the stock. I’d forget about it otherwise.
- I don’t have enough cash to take out all promising trades but want to keep an eye on all of the stocks.
- to get familiar with the platform/interface of a new broker using their demo account. This point is a theoretical consideration at the moment, but I’ll probably try it soon.