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What a thread! I bet Kaye never expected this.
I agree with Stan that there are several emotional/psychological components
a new trader must master before they will be successful. However, I think
paper trading exposes these essentials to the trader and helps them develop
a successful long term approach. The reason why is that everything a
trader does - right or wrong - is manifested in their account balance. If
the numbers are going up then they apparently are using the correct
approach and mentality. If the numbers go down, then something is wrong.
The only other factor that could invalidate paper results is their
willingness to be completely honest. Being honest is as crucial in paper
trading as it is in real trading. People that are honest on paper won't
suddenly fail when trading real money because their emotions got in the
way. Paper has already taught them to deal with that.
A would-be trader should get just as excited about successful paper trading
as they should about the real thing because it means they have found a
system that will most likely work. If their imaginary account balance is
going up, then their real account would have fared well. If they are
completely honest, then I found that the intangible problems encounter in
real trading (bad fills, etc.) don't account for a substantial variation in
results. Furthermore, if a paper trader finds that they have difficulty
being completely honest (and you know it deep inside) then this is HUGE
information about the way they think and will react in real trading. Odds
are they will also turn a blind eye to their loosing positions thinking the
market will come back. And we know about those stories...
Finally, paper trading teaches you that trading is a day-in-day out process
of doing analysis, calling in orders, and managing positions. If you can't
tolerate it while paper trading don't fool yourself thinking it will be
different in real trading just because you have real money on the line.
Likewise, if you can't make the numbers go up while paper trading, they
won't go up in real life either. If you are eventually successful, then
your trading will evolve to a point where emotions are all but eliminated.
A winner is just winner and a looser is just a looser. Trading will
become a process of steps. So-called trading by feel takes years and a lot
of $$$ to develop.
Paper trading can teach you virtually everything you will need to trade
successfully in the markets if you approach it correctly.
Paper trading is an art but here are some rules I found useful:
1. Never give yourself the benefit of the doubt on a fill. For example, a
friend of mine will use the worst price within a 1 minute period once he
decides to initiate a position. A like to wait 2 minutes and then give
myself a couple points worse then the price on the monitor at that 2 minute
point for market orders.
2. Always write your stop price down. Don't use so-called mental stops
because it will be too tempting to fudge them.
3. Focus on cause and effect. I did this because the market did that. I
placed my stop here because this is where the market found support. As
Raschke puts it "you must be able to see your stop loss point". This is
the proper play and is easy to play on paper.
4. Focus on developing a process for trading on paper. You will adopt this
same process in real trading. The importance of process should not be
underestimated. Great performers have a routine they go through before
performing. It's a mind-clearing exercise that allows you to mentally
prepare and focus. For example, great golfers like Jack N. and Tiger W.
have a pre-shot process they do before every shot. Paper trading is great
for developing this.
5. Keep a log of your trades just like you would in real trading. Make it
neat and presentable. Don't just scribble a price down on a scratch sheet
of paper. I have friends that track their trades like this and I can't
believe it. I guess this is one reason why they loose. They don't have
the discipline to develop a process of keeping track of trades or a sound
method of trading. If you don't like it, chances are you won't like
trading. Valuable info!
6. Shoot for not getting emtional about a win or a loss.
Good Luck,
Brian.
-----Original Message-----
From: Stan Katz [SMTP:skat@xxxxxxxxxxxxxx]
Sent: Friday, May 29, 1998 11:40 AM
To: INTERNET:omega-list@xxxxxxxxxx
Subject: Re: Trading Advice
My objection to paper trading is that there is a large psychological
component in trading decision-making. There is more to learn about
eliminating that component than there is in finding the "right system" for
successful trading. Concentrating on controlling losses is the first step
to being able to stay in the game. Having observed trading results by
amateurs and fund managers over the years (30 of them), I have yet to see
consistent very large returns. The distribution of positive returns is
very narrow. Developing the psyche to limit losses is, in my mind, the
first area for concentration.
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