Paper Trading... Should You Do It?
The Dynamic Wealth Report
November 30, 2009
by Justin Bennett, Editor
Sometimes in life we do things that are a complete waste of time. I’m
sure you’ve done some of these…
Like washing your car, only to have it rain the following day…
Or planting a garden early in the spring, only to see it wiped out by
freezing temperatures the following week…
Or even driving into a big city without a map, thinking you can find
where you’re going… (I always get lost.)
We’ve all done it. Some activity that seems worthwhile, but turns out to
be a waste of time.
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In trading, many beginning traders try their hand at paper trading. This
might seem like a good idea, but I think it’s a waste of time.
Paper trading is “pretending” to make trades, managing them as if you
were actually putting real money in the trade. Many proponents say it’s
a great way to get involved in the markets without taking any risk.
I say you’re better served by fishing in a mud puddle.
The problem… it’s very easy to ‘massage’ your results. You can always
change your paper trading results by looking back at the chart and
saying, “I would have done this and I could have done that.” You can
alter your past decisions to benefit the (paper) bottom line.
I don’t know anyone who lost money paper trading!
Paper trading results are always outstanding and often give a beginning
trader an unrealistic dose of confidence. They of course take too much
risk when they start out with real money. Excess risk then becomes big
losses.
It’s virtually impossible to get the same results in the real world. You
see, trading is psychologically different when real money is on the
line.
Part of the problem is new traders don’t want to lose real money. They’ll manage real money trades very differently. They’ll put stops too
tight, take profits too early.
They don’t understand sometimes taking small losses is a part of
trading. It’s impossible to be a profitable trader and never have a
loss.
Experienced traders consider trading losses to be ‘overhead’… the cost
of running a trading business.
The key is to keep ‘overhead’ low. That’s why we cut losing trades so
quickly.
Paper trading won’t teach you this valuable lesson.
So what should new traders do?
The answer is simple.
You should trade with real money. But only risk very small amounts. You’ll have real money on the line and you can really learn about
trading.
You’ll notice emotions tugging at you. You’ll realize the big debate all
traders have… is now the time to buy or sell? It’s great practice for
controlling your emotions.
You also won’t be able to “fib” your results.
You can consider any small losses the cost of your education… And if you
do start making money right away… the more the better!
You’ll eventually develop a system, learn to control your emotions, and
find an edge. Then you can start gradually risking more money on every
trade.
You’ll learn lessons with real money that you can’t learn from paper
trading.
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• Forestry and Paper (Up 93%)
In the last six months, one of the top performing industries is Forestry
and Paper. The companies in this industry were drastically oversold in
March of 2009. Smart investors knew cardboard packaging would still be
necessary going forward and scooped up cheap assets.
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