If you’ve looked around at all, you know that traders are in two camps about the merits of starting out a trading career paper trading. This can mean literally writing down trades on paper, or using a modern trading platform in simulation mode (also called “demo mode” or “virtual mode” sometimes). I am in the camp that says “Don’t do it.” The experience with money on the line is just too different–it gives people a false sense that they know what they are doing, and helps them form expensive habits that don’t work in real markets. I suggest that people start out trading very small sums of real money. So small that “success” means covering the commission costs with profits. It won’t take long for them to get brave and break that plan, and that first big loss will be very educational. :-)
Simulated Trading for Experts
I really don’t think paper trading on actual paper makes any sense for anyone in this day and age. However, my stance on using a platform in simulation mode ends with novices. Once you have some success with real trading, don’t overlook the benefits of switching your platform to simulation mode occasionally. Here, I’ll describe some benefits I’ve derived from simulated trading. These are not generalities–they are actual recent improvements to my trading, and as such are just examples. Your results will surely be different.
1) Getting used to managing multiple trades at once. From the beginning of my trading career, I’ve mainly had only one trade on at a time, which I would watch like a hawk (I use mental stops for day trades). I’ve noticed a number of times when I had to make hard choices between setups, only to discover later that I had chosen the loser of the two. So, when in simulation, I’ve been forcing myself to put on two or three trades at a time, and practice tracking them. I’m slowly getting comfortable with it, and have learned how to arrange my screens and set alerts to help me watch them at once. I claim that the simulated environment is the place to try these adjustments, because a misstep can be very painful.
2) Taking trades without waiting for pullbacks. In my real account, I found myself missing out on trades a lot, because I was waiting for a pullback to get in. My goal was to get an entry as close to a stop as possible, so I could trade more shares within my risk limits. It’s also psychologically comforting to get what can be considered a “good” price. But, often the pullback never comes, or it comes after so much time and lost gains that I can’t bring myself to take the trade anymore. With the clarity that comes with simulation, though, I realized that taking more trades by getting in with smaller size would be more profitable. Also, trading less shares is conducive to running multiple trades at once (see #1 above), so the two changes fit well together.
3) Trading without Level II/TotalView. I still have LII and Nasdaq TotalView quotes available to me, but I don’t use them anymore. Once I read enough to have a couple “ah-ha!” moments, I had a feeling I’d be better off without them. But, I would have had a hard time making the adjustment without trying it for a couple days in simulation mode first. I felt a bit blind for a while, and still did when I brought it into my real trading. But, it was a good change for me, and I think everyone should at least try it.
I could have tried all these ideas in my real account first, but it would have been more stressful. More importantly, what if I tried them, and the first few trades went against me? I might (irrationally) conclude that the ideas were no good without giving them a chance to work. With simulated trades, I can give prospective adjustments to my style room to breathe before I give up on them.
When I have simulated trades on, I draw on my experience to mentally put myself in a realistic place. Thus, I do feel real stress when my trades go against me, and real pressure to get out when I have a little profit. I think this helps ground my experiments in reality in a way that new traders can’t duplicate. It’s how I know my results would translate fairly well into the “real” arena.
Good Times to Use Simulated Trading
My main obstacle is time. My schedule makes me miss enough market days as it is… how can I afford not to be making money whenever I can? So, I tend to switch to simulated trading whenever I know that I shouldn’t be trading. This way, I don’t feel as much like I’m missing out on the action.
Times include:
- When I’m sick
- When I haven’t had enough sleep
- When things might come up to take me away from my screens often
- When I’m otherwise emotionally unsettled (death in family, fight with a friend, etc.)
- When I’ve already hit my profit target for the month, I switch to simulated mode after my second loss
Unlike many people, I don’t go to simulated trading when I’m on a losing streak. As long as I feel good to trade, and I don’t need to alter my strategy, then I want to be using real money when the streak ends.
Aside: Today’s (simulated) Trades
In my earlier post I pointed out that I’m feeling under the weather, so today was a simulated trading day. I drug myself (after drugging myself) up to my computers around 12:30EST, and immediately noticed how strong energy stocks like OXY and XOM were acting. So, I took long positions in both, and made very nice gains. It was so good I almost switched to my real account to get in. I didn’t, though. I had to consider the possibility that switching would be an example of the bad decisions I was trying to avoid in the first place. :-)
