Thoughts on Paper trading
Noticed a note on paper trading a few days ago, had some thoughts that folks might find helpful. Seems like a good supplement to your post.
I have been investing for about 10 years now, swing or position trading for a year and daytrading for 4 months. Before entering my first daytrade, I paper traded for 2 months, I would have waited longer (was thinking 3-4 months), but circumstances... another story.
First off, I whole heartedley endorse paper trading as one of the means of learning to trade. It is an essential. But a few doses of reality if I may...
When recording your entry and exit prices, be conservative about your fills, the realities are you will probably not get in on the ask or out on the bid on fast movers, like CIEN has been previously and GERN was on Friday. There are several reasons for this:
- You are in line behind other traders
- On fast movers, your quote is delayed. Got realtime quotes, and a cable modem ? Sorry, they are delayed out of the gate, as so many trades are happening that the trades are recorded late as well as the updates to the quotes, this is especially true at the open even if your stock is not trading wild, others are clogging the pipe line.
- There are many traders professional and not, using professional platforms like MB Trading or Cybertrader. They can execute faster and get better fills than your typical discount, if you're using Datek, Webstreet, or E-trade, they will wax you on executions.
- The data entry required and speed it takes to paint an HTML screen on a typical web broker can consume enough time that it can cost 1/8, easily maybe more. Sometimes this delay is enough to cause a complete miss on the trade. An exit is easier to get your price if you are selling while others are still buying, but if it starts selling, count on getting less than you expect. For while you change an order or enter a sell, even on a DATEK or Webstreet close position button, many hit a function key to close a position: Sell at market, route SOES, select net, or preference an MM, takes about 1/2 second, no HTML interface.
Oh and by the way, You will get partial fills, they can really suck sometimes. I remember entering an order for 1k shares, limit, got 215. Who was the ___ ____ who..... The stock ran 5/8 - 3/4 or something, by the time I paid commission I had lost a few bucks. Too funny... Oh well.
I seem to get partial fills on limit buys and sells 1 out of 6-7 times, I would say one in five of those do not fill completely. This primarily because I play a lot of disaster du jour stocks that have a fast bottom, a and will not chase them. It also happens on any fast mover or mo mo.
Partials happen particularly when selling at market, it is common to get several partials at varied prices (Remember, that when you want out,,, you want out !!!), don't mess with a limit sell on something going the wrong way, you could miss altogether, then instead of 1/4 - 1/2 point loss you are looking at 2 points, oh it might come back, there is usually a bounce, but rarely does it come back as high as you could have gotten out.
Then the next thing to keep in mind is that while you are paper trading, you really have nothing on the line, if you are wrong, you have lost nothing, and gained some knowledge perhaps. When you trade for real, then you have some very ugly creatures show up.
The first one is adrenaline, it can be harnessed to help you just like an athlete uses it but until you experience it a few times it can be a challenge, the rush can cause you to hesitate on a trade, in or out. You have emotion to deal with now that you did not have before, you can get past it with practice, just be aware that there will be a difference in your body chemistry.
This happens both in winning and loosing trades..
How did folks feel after selling GERN on Friday morning ? I was completely disfucntional. I had never made soooo much money so fast. I could barely talk.
The other nasty creature that shows up is the ego, you have to lose it but again easier said than done. One of two things can happen:
- A trade goes against you, your ego does not like to let you admit were wrong, so you watch as it goes even more against you. Then you want to get even...
- A trade goes really well, you make a ton of money, you are pumped. You enter another trade and it goes against you, you forget your stop, your exit rules, you think it will come back...
My biggest loss occurred on the day of my second biggest win (used to be biggest then there was GERN ;-))) ). I played CMGI overnight, for +3 or so,, scalped 1/2 off of some disaster du jour and shorted REXI from 23 to 17, a bunch of shares all. I had shorted something else, I forget what it was but did it too soon, it kept going up and up, I kept thinking it will come back after all, I was invincible....
Neither of these phenomena are likely to happen to you while paper trading.
To repeat, paper trading is a must to begin trading. Do not make the mistake of being an investor or position trader with a day off, gonna play a quick bite mo mo. Just also be aware that when you trade for real, there are physical and mental differences. Do not think that
because you have been investing for a long time you can deal with this, no problem, it won't happen to you. As an investor, a two point loss in a stock may not cause you to get out, you have time to think about an exit strategy, as a trader, you must act, without hesitation
without remorse, without emotion.
Here are some suggestions to recording papertrades
You buy at with a limit, count - to 10 on an average mover, 20 on a wild one, then record the current ask, IF it is within your limit. If it is not, you missed, you are not playing that stock. Don't worry about it, don't chase, whether real or paper,
I'm fairly sure that another opportunity will come along ;-)
On a trade going your way, sell at limit into the buying, when you reached your target same count. These are the easiest fills.
When a trade goes against you, sell at market, count and take the bid. It is the fastest way out, (Unless using an MBT or Cybertrader etc, then many like to preferece an MM below the bid, but thats Trading 301)
Some thoughts on keeping a stop,, taking a loss...
exchange2000.com
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