With nothing on the line, emotions fall to the wayside and you will probably miss the opportunity to learn something about yourself. Trading in the market is essentially learning about yourself and how you react to positive and negative situations. A great speculator once said that the market is an expensive place to find out who you are. However, you will never find out who you are by trading a paper account or virtual portfolio.
Paper trading seems to be the most over emphasized technique offered by market theorists, educational elite, market novices and/or market frauds. While learning the pure basics, I can see why a novice investor may want to paper trade; to see the results of the developing system but I will warn that these results are completely false. The results will not contain the emotional decisions that go along with risking your own cash. Anyone and I mean anyone can paper trade successfully.
It’s simple: place a trade and hope it goes up and if it doesn’t, you have no worries because you can’t lose. Therefore, you are apt to forget about sell stops, position sizing, risk-to-reward ratios and you will never experience the pressures of an up and down market when your position shows a profit or loss. The emotional imbalance that occurs when you really start to lose money is not present. Don’t fool yourself by believing the results of your paper trading or virtual portfolio. These things may give you some confidence in your system but they don’t prove a damn thing in the real world. The real world, specifically the stock market, is run by emotional human beings. People make decisions that are irrational and base their trading decisions on fear and greed. Paper trading lacks fear and greed because there is no gain and no loss; therefore there is no consequence to deal with.
We should all know by now that emotions are tied to our decisions in the markets so we can only get accurate results through actual trading. Learn to ignore the talking heads on TV that claim they are up over 1000% trading a fake account. What really makes me laugh is the person that sets up a virtual trading scenario and then allows each participant to trade $500,000 or more in their account. If you are going to trade a fake account, at least keep it authentic so you can try to learn something within the scope of reality; potentially money management.
I setup one virtual trading competition a few years back and I only allowed each participant to start with $10,000, a reasonable amount, an amount that most people start trading with. Traders are undercapitalized with $10,000 but most people start trading with this amount. The competition was fun but it was not real for me or the others. I didn’t care what risks I took and I never had a problem pulling the trigger which does happen in real life. I did try to keep my trades in line with my real life account but it varied slightly. I witnessed other traders making 20 trades per day or 20-50 trades per week. This is not real because the commissions alone, even with a discount broker will wipe you out (we weren’t day trading in this competition). I did allow margin but I saw investors abusing the fake power of leverage in their virtual account, again, playing the game for fun instead of learning something valuable.
Professors and the like teach theories while investors actually do the trading! Why would I waste my time playing for fake money when I can learn and do for real? If you want to test a system, open an account with real money, even a minimal amount and give it a try. Make sure you use enough money to allow emotions to be attached to your decisions. Without the emotional attachment, you are cheating yourself and your potential results.
This article was originally written by me back in 2005 under a title: Trade for Real