Importance of Paper Trading

G

gmst

I am a full-time career trader. When I started trading back in the day, I opened a brokerage account with Tradestation, wired 20k into it and promptly lost all the money. This process repeated few times with different brokers. Finally, after a lot of work, spending countless nights developing and testing strategies on Multicharts, I became consistent, and I have been making money ever since.

Being more experienced now, every time I want to try out a new approach to markets, I start with paper trading - for both fully automated systematic signals as well as discretionary approaches. I am writing this post, after I got some harsh feedback from ET members because I missed posting out a paper trade in real time on one of my journal here on ET :)

http://elitetrader.com/vb/showthread.php?t=278686

http://elitetrader.com/vb/showthread.php?p=4008118

Unfortunately, I have found that many traders look down upon paper trading and consider it to be worthless. I agree that emotions that you undergo with real cash in markets cannot be the same while papertrading, but papertrading has an important place in the development of a trader. It allows you to test a lot of ideas without putting your real cash on line. If you are paper trading a strategy for a few months, it allows you to gain a very good understanding of what it will take to actually trade that strategy live.

To be honest, it takes a lot of determination to papertrade consistently for more than a couple of months. If you want to papertrade for 6 months or more, it takes a lot of effort, time and patience. But in my experience, it is very rewarding and useful.

I am curious to know what are the views of other career traders on the aspect of paper trading?
 
I used to look down upon it - now, with my client work, I insist upon it and I'm a huge proponent. We build accountability into our paper trading because we use spreadsheets that track trade performance metrics, and clients send those to me on a routine basis. We also review paper trades and performance metrics during our weekly group webinars - so there is some added mutual benefit and accountability from that standpoint as well.

Some clients SIM trade, but I consider that a semantical nuance.

Paper trading with peer review and mentor oversight just plain works. Accountability is a wonderful motivator.
 
A few years ago there was a book published that used MRI scans to show brain activity.

They used games to stimulate the brain and the game was the same for two groups of players. The difference was that 1 group was playing for 'points' and the other group was playing for 'cash'. The MRI showed that the brain was responding to the two different games very differently. The 'paper trader' was using different parts of his brain than the real trader. My takeaway is that you may learn procedures and your software ok with a little paper trading but everything else will need to be relearned once you start trading real money.

If you want the best of paper trading and real trading, trade very small and scale up. Easy to do with SPY or FX. Even a tiny size will focus your attention in a way that paper trading cannot.

Good luck,
 
ramora said:
A few years ago there was a book published that used MRI scans to show brain activity.

If you want the best of paper trading and real trading, trade very small and scale up. Easy to do with SPY or FX. Even a tiny size will focus your attention in a way that paper trading cannot.
More...

I understand your point, and it is a valid one. However, some instruments like spread trades in the energy or metals complex, for example, are going to have several hundred dollars of risk and higher. So, for a system that spread trades every electronic market, "tiny size" wouldn't be feasible - especially if one of the central tenets of the system is to have this huge pool of potential trades across literally dozens of trading exchanges ( and thousands of potential position combinations ).

But if you're going to trade just one product, and you have access to the smallest tic trading instrument, your point is valid. Some personalities require "skin in the game", and other personalities can hold themselves accountable with artificial trades. If any live trade causes stress during the trade development period, then I would be against it, because there would be emotional resistance to stress testing your trading system without inhibition.
 
bone said:
I used to look down upon it - now, with my client work, I insist upon it and I'm a huge proponent. We build accountability into our paper trading because we use spreadsheets that track trade performance metrics, and clients send those to me on a routine basis. We also review paper trades and performance metrics during our weekly group webinars - so there is some added mutual benefit and accountability from that standpoint as well.

Some clients SIM trade, but I consider that a semantical nuance.

Paper trading with peer review and mentor oversight just plain works. Accountability is a wonderful motivator.
More...

You may have discovered a growth segment of the financial industry...
Paper Trading Analyst I ... critiques trading activity
Paper Trading Analyst II ... culls psychological big data between price movement and trades taken.

Seriously though, I am not a fan of sim trading for anything other than testing automated strats where no human interaction would be used live, and/or for learning the platform and features itself.

I fully understand and I actually do agree with accountability benefit. However most people only have access to market neophytes... "approval" from a marketing director sister or a retail regional manager best friend carries no value. Just as important, unless reasoning behind a particular trade can be appropriately discussed and possibly challenged, there is no value.

Your clients are lucky... they have you. But even that is not a substitute for the release and suppression of neuro chemicals that occurs while trading live.
 
tiddlywinks said:
But even that is not a substitute for the release and suppression of neuro chemicals that occurs while trading live.
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Completely valid point. Even the most expensive combat simulations and the repetition of military drills and maneuvers is no substitute for live combat under fire.

But the longer that a client practices with the paper trading and subjects himself to both my own personal and the Group's peer review, my observation is that the better their live trading performance is when that time arrives. I have to do what's in the best interest of my clients, and what will most likely produce a foundation of positive outcomes and good solid references for future clients.

Some of my clients come to me a bit gun shy after getting torn a new asshole scalping CL or 6E or GC or whatever. They are going to hesitate or not take trades if they are risking live capital during what is designed to be a training and evaluation period with respect to my program. The idea is that my new clients take trade entries and track their performance closely and learn from their mistakes. For example, the typical mistake for newbies is to take a trade too early. Even with comprehensive rules and studies and a complete system that I made as mechanical as I dare, there is some tradecraft development. And each client has a different risk and emotional profile. Which is why I tried to engineer as much discretion out of the system as I could find. But still, there is a level of tradecraft required. That comes from experience using the system over an extended period of time and living through various market cycles.
 
I'm telling ya Bone...

You found a growth segment...
Paper trading with REAL accountability AND accountability for learning is a standalone niche that people will pay for! Don't wait too long. First to market and all that. ;)
 
bone said:
Paper trading with peer review and mentor oversight just plain works. Accountability is a wonderful motivator.
More...

It's the accountability that make paper trading a worthwhile exercise.

Score yourself not on how much money you would have made or lost but on whether or not you have the discipline to follow your plan.

Of course you have to have a trading plan to follow which I'm guessing that most new traders don't have.
 
Just like hitting a blocking dummy in a football practice is very different different than tangling with a real opponent on the field paper trading is never comparable to the real deal. Yet both have their place.

Early on paper trading can show a diligent student that there are no sure things. It can save people a good deal of money. And then, of course, the time comes to put skin in the game but it needs to be a modest amount of skin. Preservation of capital is pretty damn important.
 
Paper trading is a plus because it gives you a "plan" and this is quite better than no plan.
Lot of people are trying to go from "ideas" to "ideas" but with no plan. And without plan, you lack discipline.
So paper trading can help, but IMO you must written behavioural rules too that you should respect with your plan in order to avoid big disappointments when you trade in real life. Easier said than done.
 
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