I am a bit biased when it comes to paper trading because it never worked for me, and I never made progress in my trading with such models. So when I started, I was a perpetual paper trader, and I could not live. It wasn’t so much the money, but the to experience the actual emotional side of trading. The second part was where I went sim, live, sim.
So basically, I did not know the limitations of paper trading and over-traded and over expected. I did not realize the demo’s limitations, where you get filled on each tick, profit on each price target, and no transaction costs. It does not happen in real life and makes paper trading almost a fantasy play.
Paper accounts make you over trade, and when you take it to live, it all falls apart.
So what do I do instead now?
- I research the strategy: risk/reward, drawdown
- I take it live and hide the P&L. All I care about is whether I execute the program
Most people obsess over the P&L and conventional wisdom-based decisions related to P&L. I didn’t want to think about my P&L; it was distracting. I would check my numbers end of the day or end of the week if I did not execute many times.
- if the system did not exceed its drawdown, I stay with it; if it did, I may terminate it or see if it can recover within the same time, it was in testing.
Do I think paper trading is useless? When you learn the markets, it is not. But, it will not put you through the same state of mind when you place actual trades. Now that we have the micros MES MNQ, it is better to do a small size and see your reaction to that paper trade.
There is a way to balance testing on paper and take it to live because many professionals do that. But, I do not know how to overcome the paper trading limitations:
- No emotional accountability
- Fills that always occur for entry and profit
I am continually looking for feedback on how traders develop their opinions and how they take them to the market.