Paper trading is hypothetical trading. If you have never traded anything before, you wil probably do some paper trading. The benefit of paper trading is that it wil help the new trader become acquainted with the basics of interfacing with the markets. This is often a “demo” account with a broker or clearing firm that provides real-time market data but provides a hypothetical balance.
You are al owed to buy and sel as much as you want, just like in a “live” or “real” account. Your hypothetical gains and losses are accrued against your hypothetical account balance over time. As time goes on, most traders find that they can gain quite a surprising amount of paper-profits in a very short period of time. These traders are now completely convinced that they can easily duplicate those hypothetical results in real time with real money. They open their real trading account and POW! Within about three to four weeks they are down usual y more than 50% of
their equity. This is not my opinion—this is actual fact. Ask any broker in the industry what
happens to “paper-traders” who open a real account. The ratio of “paper-traders” to “winning
traders” is about one in ninety.
Why does this happen?
Because there was never any real risk to the trader.
Let me il ustrate by tel ing you a story:
I have flown a T-38 Jet fighter in extreme conditions. Just knowing that, I think most people
would agree that I probably have a certain amount of experience flying airplanes.
Here in the suburbs outside of Chicago there is a smal airport that has a “Fighter Pilot for a
Day” program. This is where you fly co-pilot with a retired military pilot in high-performance
aircraft. You are al owed to fly the aircraft (with the real pilot’s hands on the controls) in an attempt to “shoot down” an “enemy” fighter; which is another co-pilot flying another airplane with HIS retired military pilot. You are awarded a “kil ” if your laser guns hit your opponent. It’s like a very expensive high-stakes game of laser-tag.
I went for a day to have some fun. As it turned out, I was flying against a complete novice. Of
course, I didn’t tel him I had some Air Force training. I asked my adversary what kind of training he had. He very confidently told me that he was the top scoring “ace” from his on-line club and various other national methods of playing of high-tech video games. He told me that he could “out-fly” almost anyone in the Microsoft Flight Simulator in both the F-16 Falcon and F-15 Eagle.
I agreed that his credentials were very impressive and proceeded to blow him out of the sky no
less than six times in 20 minutes. To start with, this novice had never flown in aerobatic
conditions so he spent most of his time trying not to throw-up. He stal ed and spun most of the
other time. If he wasn’t flying with someone he’d be dead. In the end he had to quit early
because he simply couldn’t take the physical punishment. To add insult to injury, I have never
played Microsoft Flight Simulator (ever). I do the real thing. BIG DIFFERENCE between the two
as you can see.
Do you see the point I’m getting at? PRETENDING to do something is never the same as
actual y doing it. Yes, it is helpful up to a certain point to simulate certain things but that can only take you so far. In the case of air-to-air combat, PRETENDING to be a fighter pilot will likely get you kil ed if you ACTUALLY go up against a trained fighter pilot. In fact, the US Army Air Corps learned this the hard way back in WWI. They sent young men into combat with oftentimes less than 10 hours of actual flying time. Imagine how fast those men were kil ed when they went man-to-man with Richthofen, Boelke and Immelmann. Everyone concluded flying was
“dangerous” when in fact it was the lack of training that was “dangerous”
I’m not trying to impress you with my flying skil s. I’m trying to impress on you that paper-trading is exactly like playing Microsoft Flight Simulator. It is pretending to be something you are not while convincing you that you know what you are doing. Paper trading hides from you the need for real skil s. Paper-trading wil get you kil ed because when you go up against real traders with real money it’s not a game anymore.
If you make the wrong move you lose equity. There is no “do over” button. If you stal your F-16 in the simulator, you get another chance; stal your F-16 in combat and you die. Lose money in your paper-trading account; just sign up for another trial account. Lose money in your real account and you go home broke.
Paper-trading is a waste of time because paper-trading will never give you the real skil s you
need to trade. Al paper-trading can do is help you learn how to use the functions of your trading platform. In fact, that is a good thing. But once you learn the functions of your platform and your account is ready to trade, everything you learned paper-trading goes out the window because NOW IT IS DO OR DIE. There are no second chances.
Don’t make mistake #1; don’t think you know what you are doing because you pretended to
trade without taking any real risk.
HOW TO MAKE THIS MISTAKE WORSE:
Continue paper-trading for more than 30 days and/or go back to paper-trading if you have lost money in your first real account.
SOLUTION: Open the absolute smal est account your broker will al ow and trade for 90 days
the absolute smal est size possible. If you are ahead, increase your equity size and your trade
size by a factor of 20%. If you are losing, stay with the real thing; it’s the only way to learn.