Before getting to the meat of this week's article, I have to say
I was amazed and humbled by the sheer number of positive emails I
received about last weekend's article. Thank you. Only one email so
far was negative and that from someone who admittedly did not read the
article but who was offended because I entitled the article: "Lots of
Ways to Skin a Cat." Let it be known that I do not really advocate
skinning cats. It is an old expression not to be taken literally.
Anyway, I digress. I frequently do get very helpful suggestions
in emails and one I received was from a subscriber in the stock
brokerage industry who, among his many insightful comments, suggested
that he never understood why paper trading was so frequently
recommended because it is definitely different when real money is traded.
He is absolutely right that things are very different when real
money is placed at risk as I'll discuss below.
I am an advocate of paper trading, but not because it is the
same as putting real money at risk. Paper trading has its place, and,
in my opinion, that place is a continuation of a trader or would-be
trader's education. Paper trading is simply practicing strategies
without using real money. Nothing is at risk and it costs nothing but
time. Practice trading, if done properly, helps the trader learn the
strategy he is practicing better. Nuances can be discovered without
taking financial hits. The practice trader can learn, for example,
how and when to adjust option positions or how and when to take
profits. It can be an aid in discovering how to cut losses and let
profits run unemotionally. For me, those are the primary benefits of
paper trading. Though I have been trading real money for many years
now, I still paper trade when I am examining a strategy with which I
am not completely familiar.
However, I am in complete agreement with my broker-subscriber
who says that paper trading is not the same as putting real money at
risk. It isn't!!! When someone paper trades, it is not likely that
the heart will beat faster or the lump will come up in the throat.
There are no sweaty palms in paper trading. Real money trading is a
different story and I know of no way to replicate real money emotions
when paper trading. Placing real money at risk does bring fear and
greed to the surface. Those emotions create the next and extremely
critical battle the successful trader must face on the road to
success. The goal is to trade without emotion because the emotional
trader is the trader least likely to succeed. Perhaps completely
unemotional trading is unattainable, but I am convinced that those
traders who succeed are those who have the emotions under some
control, who have tight discipline in their trading, and who
discipline their money management.
I suspect that intimate knowledge of a strategy gained earlier
through paper trading helps a trader control emotion though it does
not win the battle. I have seen a number of successful paper traders
go down in flames when it came to real money trading. When asked what
happened, they have universally told me that when they started using
real money they stopped doing what they had been while paper trading.
They abandoned their business plan, they did not follow their exit
strategy; in short, they let their emotions rule.
The ultimate goal, I believe, for the successful trader is to
trade with discipline and as little emotion as possible. Paper
trading can be extremely helpful, but it is only a part of the puzzle.
Good Trading!
Bill Kraft
Mr. Kraft's past articles are posted on our website for your review.
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