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Some Thoughts on Paper Trading

Not everyone believes in paper trading.  Here are the thoughts (link no longer active) of one nay-sayer.  The primary reason is that it's not real money and that no emotions are involved in the decision-making process.  In addition, there's a temptation to turn the paper trading into a game.

I cannot disagree more.  First, the successful trader must learn to control emotions, and if you can make emotionless decisions when it's practice money you may be on your way to doing the same with real money.  

If you want to be a winning trader, you should begin by taking paper
trading seriously.  You must concentrate on making good decisions and  it's a good to experiment.  In
fact, that's part of the learning process.  Try something, decide if that
trade fits within your comfort zone and try to learn from this new (for you)
type of trade.  It's an intelligent idea for trying out a new strategy.

Important: Do not decide that any new trading idea is 'good' or
'bad' based on one result.  There is always some luck involved
when investing, trading or any other activity for which the outcome is uncertain.  Consider the trade chosen and the result.  Decide if the
result was reasonable or an unlikely outcome.  Analyze whether you were
comfortable owning the position day after day.  Rinse and repeat.

That's the learning process.  It takes time. 
Please remember that there are millions of kids who want to be professional
athletes.  Some put in lots of practice time and are able to make their
college teams.  Some make it to the professional level.  But very few are Michael Jordan. He did not get there by taking shortcuts.

Practice is one key ingredient to success.  Talent is
another.  Not everyone can be a winning trader.  If you practice and
learn and still cannot make money, there is no reason to believe you will do
any better when trading with real cash.

To me, the difficult part is the patience required.  A
day trader makes many trades over a short period of time.  He/she gains
experience quickly.  But for option traders who hold positions, such as
covered calls, butterflys, or iron condors – a single trade can take a month or
two.  That requires enormous patience when trading with play money.

Anyone using a paper account wants to get practice and experiment with
various ideas.  But it does take
time.  You can trade real money and a practice account at the same time,
but one ingredient for success is the ability to recognize when you don't know
enough to make good trade decisions.  It's seldom as easy as: open the trade, close the trade and deposit your winnings
in the bank.  Many times questions arise and decisions must be made along
the way. 

Do I suddenly have too much risk?  How can I fix that?

Did I earn enough profit?  Should I exit now and take

The position is not working.  Exit or wait?

The market is suddenly more volatile.  What should I

Am I trading proper position size?  How can I find out?

The answers are not obvious.  It takes experience
to get a better understanding of how decisions are made.  Sure you can
trade with real money, but only if you place a very small portion of your
assets at risk.  If you have a $100,000 account, you can afford to trade
one-lots instead of paper trading (although I recommend paper trading). 
But if you have $10,000, you don't want to lose $500 or $1,000 per trade just
to get your feet wet.  It's not worth the risk.

If you can handle multiple positions without getting
confused, that is one way to learn and gain experience more quickly.  For multiple positions, I
suggest different expiration months or different stocks (or ETFs or indexes) to
keep each position isolated from the others



"I am currently reading your book " The Rookies
Guide To Options" and must say that it is excellent.  I have no experience
trading options and was always a little "scared" of the subject but your book
puts everything into perspective i
n a very reader friendly manner." TK


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