IMO paper trading is bad because it will most likely make you take on more risk. Holding for longer than you should have, entering the trader too early, and it will have you pushing the reset button after every bad trade.
I did paper trading for 7 weeks. You can see the summary here.
I felt the experience was very helpful. I also felt the experience had the following shortcomings (which were largely the result of printning the day's price action on paper, covering up the page and looking at each bar individually):
Commissions. Particularly tough if you are trading multiple lots and you don't know how many will get filled together or separately, which affect my commissions with my broker.
Slippage. Really tough to tell if there are "gaps" in bars where no trades happened. If you have your stop set at $45.44 and you have a bar that spans that level, it could be that the market ran up with no trades to trigger your stop and you didn't stop out until 45.49.
Context. Having the day printed out on paper lets you know 1) a rough estimate of the day's trading range, 2) a premonition of volatility for the day, 3) an unfair advantage looking for reversal signals when you are at the top or bottom of the page. However even having clues on those things ahead of time, it is still very possible to lose money - amazing.
Paper trading is only valuable if it's reflective of how you would behave with real money.
In my experience, that's not possible for me. I'm sorry, but there's simply an entire world of difference between the stress you feel, when the market is a tick away from your stop when you have real skin in the game.
There are 3 main stress decisions in a traders life.
1) Should I get in? If you've recently had a bad run this can be very stressful...nothing like overthinking setups, watching edge diminish or completely dissolve because you've lost your ass recently and you're terrified of burning down your account or going further in the hole. The next emotion is when you're on fire and you've had a good run and you start getting greedy and trying to take setups that you would normally pass on. The other emotion is the "flat" emotion where you're so tired of being flat that you're just itching to get into the action. None of these are easy to replicate with paper.
2) I'm up, should I take profits now, or hold out for more? When the market is just below or at your profit stop, seconds can seem like hours. When the market goes your way and stalls out, you can sit there and convince yourself that this is the best you can do. When you combine this stress (#2) with #1 above, it can also make for a very stressful event. If you've just gotten your ass beat down badly over several trades and a new position goes your way and then stalls before your target, it's VERY easy to start talking yourself into bailing with what little profits you have now. The worse feeling in the world is having a trade runup your way and then go against you all the way to your stop.
3) I'm down, should I bail or hold out till the market comes back my way? "It can't keep going forever" (right?) Wrong. When you combine 3 with recent history, it can be the worst emotion you'll feel. I've literally seen guys scream and yell at their computer screens. "MF'er" seems to be the prevailing choice for those frustrated by the market. When you combine a bad run of trades and then you enter a new position, thinking this is a premium setup and then the market RACES against you, it's beyond dejection, it's frustrating, angering, panic evoking, shear madness.
If you can somehow replicate ALL of these emotions when paper trading, I would say, it's valuable.
Back when I tried discretionary, I almost always ended up profitable paper trading. Because it was VERY easy to get into a hole and simply double or quadruple down on a new position and dig myself out quickly or end up nicely in the black again. That and again, trading with paper has virtually NONE of the stress or emotion that trading with real cash.
Sorry, I see little to no value with paper trading, other than shear execution training (learning how to manipulate your platform with stops, bracket orders, exits, targets, etc.)
"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
The following 2 users say Thank You to RM99 for this post:
If you can't make money in SIM ... you probably wont make money live ...
Just because you make money in SIM ... doesn't guarantee you will make money live...
I've seen a lot of traders who developed and practiced their discretionary trading for months in SIM until they were consistently profitable...
But as soon as they traded live and took one losing trade... all the rules went right out the window ... consequently... they suffered terrible losses ... and promptly decided SIM trading was worthless ...
I'm just a simple man trading a simple plan.
My daddy always said, "Every day above ground is a good day!"
The following user says Thank You to ThatManFromTexas for this post:
I've met people who only became successful when they started trading live , SIM trading just had a bad effect on their self-discipline .. too much Disneyland can make some people crazy so a dose of reality (live trading) will help them .
Paper trading will let you know whether your strategy is sound or not, real trading will enhance your emotion management. If in the first place, your strategy does not work in SIM trading, there is no way to make money in real trading, no matter how good your emotion management is. I think SIM trading is an important first step
Personally I am not a fan of simulated trading. Right, it is fantasy land and very loose emotionally. I also think back testing beyond one or two data runs is a total waste of time. I learned with real money in a live till the next day environment. I still believe in that method mostly because astute people know right away if this is for them or not...SIM is basically a video game.
But I do understand the potential benefit of learning without consequence for a very short period of time. I do agree that if you can not make consistent profits paper trading that it will be almost impossible to do so in the real world. SIM and live trading from an emotional perspective are not even items that can be compared in a valuable way.
If you have to SIM, move to micro contracts as soon as possible would be my advice.