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My feeling is that if you cannot be profitable paper trading, then you will not be profitable trading in the real markets.
Paper trading allows you obviously to practice your trading skills and is in fact an excellent way to practice... Also you will not suffer from undercapitalization like many new comers do, since you usually get 100k or sometimes 1million of sim capital to trade. At least, money management wise, you will not be pushed to over risk for peanut returns.
Then, once you are consistently profitable over a period of time and you feel ready for the real markets, you shall try trading the real markets. The key is to be sure you are consistently profitable first; you will feel it when you are! If you do not feel it, then you are simply not ready to trade the real markets
When making the transition from paper trading to real trading, the psychological issue may be or will surely be felt and have to be dealt with just like when you learned the technical skills of your trading system. But at this point, you don't have to concentrate and waste lots of energy working on the trading skills and money management; but most of your focus will be directed at the psychological aspect.
Basically, one thing at a time as we say little by little.
Successful people will do what unsuccessful people won't or can't do!
I think that trading with real money is completely different emotional experience to trading with paper. Especially if you are trading for a living that is your sole income is from trading. People just don't behave the same when there is no risk.
I'll qualify my post by adding I am only talking about discretionary trades. Auto trading systems should and must be tested and tuned only on paper account.
IMHO paper trading (SIM) if done for too long just enables (by repeating) bad habits and this can affect one's LIVE trading dramatically. Of course, a certain amount of SIM to be consistently profitable as suggested above and to test out new strategies is a must. However, you just can't duplicate the pressure of LIVE trading and my experience has been that I needed to un-learn some of the bad habits learned by trading in SIM for way too long. The biggest bad habits for me were not being careful enough and over-trading. One can still be consistently profitable in SIM while still indulging in those bad habits, however the LIVE market (with the extra oomph of real money) tends to punish those bad habits (unlike SIM).
I found that if you're "desciplined", that paper trading is invaluable for discovering good patterns to trade and to develop your "Rules".... As others have stated, DO NOT trade with real money, until you can "Consistantly" make money sim trading..
Then, when first trading with real money, trade ONLY your rules developed through sim trading (that's where the descipline comes in) and trade the smallest size possible, until you're comfortable and making money consistantly...
I've been trading for many years and I still Sim trade (currently sim trading CL for several months) because I've never traded it before..each market has it's own personality- it's important to learn its behavior with play money first..
My feeling is that paper trading is useful but ONLY if approached with the right mindset. In my opinion the right mindset requires that you:
- Treat every paper trade exactly as if it were real. You cant allow yourself to take a trade but then ignore it or take it off because you see at a later stage that it was actually a stupid trade. You cant allow yourself to remove a trade you put on by convincing yourself 'I wouldn't have taken that trade in real life so ill just ignore the fact that I took it now'. If you take a stupid trade while paper trading, well then you trade your way out of it as best as possible (according to your rules), and you take the P&L loss.
- Although it is impossible to replicate all the emotional and psychological factors of live trading, you need to at least try to imagine what you will be feeling at the passing of every single bar. Dont just blindly wait for the next bar/setup/entry/exit, because the emotions you are going to feel when live will make every tick a battle (at least to start with), so you best treat it that way when paper trading.
What works for me, is that I keep reminding myself that I plan on making this my career. The last thing I want to do is trade for 6 months, blow up my account because I wasn't properly prepared and end up as a corporate stooge again. I treat paper trading with the significance it deserves because if I cant get that right, then I WILL NOT trade live and have zero hopes of leaving the corporate world behind me.
With all that said, I dont believe anything will competely prepare you for live trading.
I am going to say something that you will find odd but please read this post until the end.
Paper Trading is ONLY useful once you have traded real live funds, in my honest opinion.
The negative of paper trading:
1) It will not prepare you emtionally for trading real live funds
2) It could give you a sense of achivment in methods where you have no
chance in getting filled in real live trading (scalping methods, going for 2 ticks, etc)
3) Giving you "shelter" every time you lose just to try another paper trading method that
could be useless in real life.
The Positive:
1) Tweaking a method that has stopped working because of volatility, wide/narroe ranges, etc
2) Trying out your method that actually works on a different market
3) letting the same system run on a paper trading mode because it ran its course. Now you are not sure if the system is broken or this is just a temporary drawdown.
Essentially, a paper trader that has real experience will have an edge in his approach while going back to demo because he/sher could know what works and does not in real life. The application will be a lot more practical.
I am not saying one should not paper trade, but anyone can open a parachute when they are on the ground.
Trading futures and options involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results. You may lose more than your initial investment. All posts are opinions and do not claim to be facts. Please conduct your own due diligence. Use only Risk capital when trading Futures.
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