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.
I can not answer in absolute terms whether paper trading helps or not. I have heard many opinions over the years. It is an individual decision to see whether sim mode is helpful. One way to approach it is from a mental model perspective and see its limitations and benefits. I’ll try to be objective as I can, without telling you that you should change one way or another.
I want to skip the benefits of sim trading, such as learning the platform, order placement, and other valuable things such as learning when the market is liquid and its operating hours. They are essential factors, but the key is whether to build a profitable model from a sim model is possible.
As I said, it is not a black or white situation because it is also a matter of who is one on the sim, his /her experience, the simplicity or complexity of the model, and whether they understand the limitations of the model in a world that does not execute actual trades and or has latency issues, for the most part, is not a factor.
So sim is lacking in three departments, and maybe those on sim can keep it in mind.
Sim lacks context for many beginners. Most on the sim do not think in terms of context but absolute value. They measure X only, not X, in the context of the market environment. It is a perception flaw, where you think that certain variables will work at all times, despite market volatility and liqudity. What would help? Check your method going back as far as you can.
The Ego Flaw on Sim. We fixated on finding one solution that will constantly work. Real traders recognize that they will need to adjust behavior, tweak systems, and watch what gives them the most considerable odds of success. They think odds, not ego.
Why do I call it an ego issue? Because people with huge egos are not prone to change and changing their opinion regardless of what is around them. They will “fight” with you to defend their positions instead of being truthful and agreeing that specific facts conflict with their beliefs. A person going from sim to real will insist on going about his/her trades in the same fashion experienced in a sim account and not adapting to actual live market conditions that may conflict with a sim model.
The third issue with sim is what I call the “emotional distance” issue. It’s the emotional distance that exists between real live trading and sim trading. In the sim, there is no pain. You are removed from the direct consequences of any attachment to money, pain, or gain. While many try to convince themselves that they take sim and demos “seriously,” they fail to understand is that their psychology, DNA, and temper could not be fully measured in a sim account.
The “distance” issue is what causes many traders to go back to sim, try models, fail, and go back to building another model.
I believe that people who traded live for many years recognize these flaws and build better models on sim because they don’t treat them as absolutes, but they can build on as models.
