Paper Trading versus Real Trading

With nothing at stake, you can show that you are able to succeed in paper trading because the psychological element is largely held in check. Whatever trend following method and technical analysis indicators you are using, you are able to apply that without emotion. To the best of your preparation, you make a decision to enter a position. When you see your position is at a loss and is on the wrong side of the trend, you close the position. There is none of the psychological game that people use in trading with real money where they justify that it is just a “paper loss”. And if indeed you are on the wrong side of the trend, that paper loss becomes an even bigger paper loss and your next psychological play tells you to hold on to that paper loss until it recovers. Now you are losing to time and have become a longer-term trader than you first started as.

So, you have graduated from paper trading school. Your credentials are excellent. Your track record is very good. You have confidence that your methods and systems work. You have proven that you can exercise discipline. But will you be able to exercise the same level of performance in real trading? Will you be able to suppress your emotions when dealing with real money?

While talking to my son who is doing simulated stock trading in an accounting class, I learned that he was the leader in gains for the second-time running. In his short time with paper trading, he has very quickly learned the same things that took me longer to learn in trading with real money. I asked him how he made his entry point decisions and he said he looks at the general trend of the market along with the trend of the stock being traded. He has a general notion that the company behind the stock is on solid ground with good fundamentals. He does short-term trading. When he sees his position in the red, he sells immediately. When it isn’t that case, he is making money on his positions which he sells out quickly to take the gain.

Not meaning to stifle his enthusiasm with his great findings and conclusions, I pointed out that the psychological factor is what ultimately hinders trading with real money. When I told him that people end up in paper loss scenarios, he merely retorts in typical youthful fervor that it is just a cover-up for a situation that should not be. He logically states “just close the position and take the loss”. He is of course right.

When I made the point that emotions will get in the way when it comes to real money, and that it tends to be very hard to overcome ones own emotions, the next logical answer he gave me was “I can see myself going to the casino and winning at Blackjack and I would do that before stock trading with real money”. His point being that Blackjack is more calculated and deterministic. I am not conjuring up the notion of stock trading as being equivalent to casino gambling (although others may have done so).

Furthermore, I did not get into the discussion of the equal need to suppress emotions in casino Blackjack. But suffice to say, the psychological factor with real money must be kept in mind when transitioning from paper trading to trading with real money.

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Just in terms of allocation of time resources, religion is not very efficient. There`s a lot more I could be doing on a Sunday morning. - Bill Gates