Should I Paper Trade?
Many people begin their quest for daytrading success by being conservative and paper trading. After a few weeks or months, they develop a 'successful' method of trading and get the confidence to begin trading with a real account using real money.
Unfortunately, a funny thing tends to happen on the way to the bank. They find that they consistently lose money. Why? Well, the 'real' world is not nearly as easy as the paper world. The reason is 100% related to liquidity (see Liquidity post). The only difference between paper trading and real trading is getting your orders filled.
This is easily done with paper trading. Simply assume you can buy at the inside ask (seems conservative, right?) and sell at the inside bid. Further refine your paper trading assumptions by assuming you will get filled at whatever the inside bid/ask is after a delay of 5 or 10 seconds from (paper) order placement (seems even more conservative, right?). Regardless, you will likely find that it is much easier to paper trade than to trade for real.
Why bother paper trading? It sounds like paper trading is a waste of time. => Not so fast. I can assure you that any system that loses money while paper trading will lose money even faster during real trading. In this respect, paper trading is very valuable. Why waste real money by trading any system that cannot be consistently profitable during paper trading? Also, you can develop a huge amount of knowledge and experience while paper trading. And in addition, paper trading is cheap!
Don't waste your hard earned capital on a system until you develop the confidence that it can be successful while paper trading. NASA uses flight simulators for a reason. They don't send astronauts into orbit simply with the confidence that they think the astronaut may possibly know what to do at the right time, perhaps.
If you find a successful system, there will be plenty of time to make your millions in the future, don't worry about not making money today. I am a firm believer that paper trading will not adequately simulate real trading. But, I believe paper trading is a absolute requirement for any new trader who wants to be successful, but cannot afford to lose a fortune trying. Paper trading will not assure success, but it will limit the loses while you search for it.
Once you find a 'successful' system, carefully attempt a few trades in the real market. Does it trade as well as it paper trades? Why or why not? Can you improve you order routing skills to make it trade as well? It is hopeless to get this system to work at all in the real world? If successful... GREAT! If not, you found out cheaply... Move on to another system or refine your current system based on what you have learned. |
