What is the consensus about paper trading?

KenLong answered one year ago …

As Ethan points out Paper Trading is not real trading and lacks many of the emotional hangups of real trading, however it is an invalulable tool for working on ones trading skills. Paper trading is best for testing your methodology and your implementation of that methodology.

What I mean is, if your running a system, either discresionary or mechanical, or working on building your system, and every successful trader follows a system of rules for evaluating and accepting trades, for when to get in and get out, for how to manage your base capital and how to manage the active trades. If your a trader, and anyone who thinks about entrys and exits, position sizing, risk managment, etc., is trading on one level or anouther, as opposed to an investor who buys and accumulates stock in good companys, with no real plan for managing those investments, no plan for protecting profits, taking profits, managing risk, or avoiding drawdowns, the typical value investor buy and hold mentality.

If your a trader, you need some sort of system that you can follow, you need to have trust and confidence in the system and your ability to implement it successfuly. This type of confidence and knowledge does not come from reading books or following others, it only comes from personal experience. All the knowledge youve gained from reading and studying is important, but untill you can implement it successfully and prove yourself, it is largly meaningless.
You can do this in the market with real money, playing small positions, which is highly recomended. But prior to that, or concurrent with it, paper trading, or better yet working on a simulator, can help you to test unproven ideas, to build reflexes and speed, to gain experience and familiarize yourself with the processes involved, as well as familiarizing yourself with your trading platform and tools. In the process of this you will find errors in your plan, judgmental errors in your own psyche, and difficulties implementing your strategy, often due to a flawed or incomplete process, lack of experience or skill, or misjudgement of the effort and time, and knowledge, needed to implement the strategies.
The best place to correct and work through these inadequacies is outside of the market, where you have no real money at risk. This allows you to experiment endlessly, testing different trading styles, timeframes, markets, and leveraging vehicles, untill you can confidently say that you know yourself, that you know your system, that you are tried and tested, and ready to go to market.
Even at this point there are still unsolved dilemas, mostly dealing with the human emotions attached to winning and losing money, but also dealing with the ever changing market place. No matter how good you are there will be losing streaks that make you doubt yourself, there will be times when your system does not work as well as others, and there will always be new information and ideas that need to be tested and proven. In all of these situations its best to start on, or fall back to the simulator, to test and improve, and prove your product before proceeding.

Paper trading can be done anywhere, as simple as taking and keeping notes, but lacking any sort of real time experience. Even logging trades in a portfolio keeper, available at all of the major financial sites, is a poor choice for gaining simulated experience.
(I use MSN Money's portfolio, available at moneycentral.msn.com/investor. One of the best free portfolio keepers on the web, allowing you to keep multiple portfolios and multiple accounts within a portfolio. This allows me to keep listings for all of my brokerage accounts in one portfolio, as well as to run a stop loss account where I list all of my holdings and maintain the price at the most recent closing high, so it always shows my positions at the high or how far off the high they are. In this way I know when I'm continuously updating prices I'm on a roll, and when I'm not I have to watch for problems. As well this portfolio keeper is completely customizable, so I can keep whatever is important to me at hand, charts, news, percentage changes, fundamental and financial ratios, etc.).
Good simulators are available at most brokerages. InteractiveBrokers, OptionsXpress, ThinkorSwim all have good simulators that I know, as well as many others. When I opened my account at ThinkorSwim the simulator was up and running months before I acually funded my account. They all want you to come in and learn their platform, test their tools, and hopefully fund an account. This is one of the easiest ways to get fantastic charting and analysis tools for free, as well as to get experience working on a professional platform, and they all have their own portfolio keepers, although none are as nice as the one at MSN.

So get on a simulator and practice what you know. When you have confidence in one style and time frame place some real trades, but continue to practice trade. There is a continuous flow of ideas and stratagies that need to be tested before you can say that you have a complete system, and even then there are always ways to improve.

Thanks, writing this was good, sorry it is a bit long. I just wish there was more space for interaction and feedback. Without the ability to discuss topics such as this in depth, and receive feedback, and maintain a discourse, this site becomes very lacking. We are all teachers and students, we can all learn from each other, but it takes much more than a Q&A glossary, and some silly point rating game.
My game is out there in the markets. If I am going to invest my time here, I expect some real returns. Namely, I seek like minded individuals, who enjoy sharing their experience and knowledge with others. I seek others who are willing to discuss and test arcane strategies in an attempt to find the most profitable ways to take money out of the markets.
Thats all that this game is about, taking money out of the markets. Nothing else matters. We can all win within our own timeframes and styles, if we use tested strategies and calculated risk.