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Since I have some "Re:" without the original email I think I am missing
part of this thread (or maybe part of it was sent privately). I have a few
points about paper trading I wanted to make.
First, for paper trading to be really valuable, is must be as realistic as
possible. Even small differences between live trading and paper
trading can make a huge difference in profitability especially if it
is discretionary trading.. I developed a datytrading methodology
and traded it against months of historical data. I walked each day
bar by bar and determine which trades I would take and which ones
I would not. The end result was a nice profit. My next step was to
paper trade against real-time data. All of a sudden my methodology
was a loser. What I found was that in walking a chart bar by bar,
I would see 1/2 of a bar's width of indicators that belonged to the next
bar. This "foreknowledge" was biasing my trading. Take into
account everything you can when paper trading: the time it takes to
make the call, various slipages due to how rapid the market is moving,
commissions, etc. When it doubt, assume the worst. If you still have
a profit, then take it live.
Next, for most markets and systems, there is no way paper trading
truly emulates the real market. I paper traded a SOES methodology
for eight weeks with a profit nine out of ten days. My paper trades were
entered using the SOES system and there was a person somewhere
that was mock filling the trades. When I went live I lost money. The
difference was that my paper trading made a lot of its money on
small windfalls. Usually I would be going for 1/4 or an 1/8 but
occasionally
the markets would hand me a 1/2 or a 3/4 point profit. In live trading
I found that my fills which took only 15 seconds during quiet times were
taking 1 or 2 minutes or even canceled due to time out during fast moves.
This meant that I could not get into the market to take advantage of fast
moves, and occasionally I could not get out of the market and would
take a windfall loss. There are ways around these problems, but
no amount of paper trading would have given them to me.
Finally, paper trading does not deal with the emotional aspect of making
and losing money (greed and fear). A couple of weeks back a trader on
this list made the comment that a drawdown of one's profits was different
than a drawdown of ones original trading capital. I expected this comment
to draw some fire. On one hand, it is absolutely wrong. If a
discretionary-style
trader is at total calm and is not effected by either fear or greed, then
each
trade is independent of the next -- it does not matter where the account is
currently . On the other hand, I don't know of any trader who has perfect
calm. Even Linda Raschke in Street Smarts mentions that knowing how
far ahead she was for the year impacted her decisions and resulted in
significant losses. While paper trading may build confidence that will
help with this problem, only live trading and working with with the
resulting emotions will teach the lessons that need to be learned. I
know of a person who has been profitably paper trading for years,
yet he as never pulled the trigger. I imagine that if he ever does pull
the trigger, he will back out the first time he suffers a loss.
== Rob ==
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