PAPER TRADING OR JUST DO IT?
This evening, Howard Lindzon was on Twitter (follow me here) discussing the merits of paper trading versus trading with real money. This ones an easy one for me. I think there is no practice like the real thing. I have learned 95% of the things in my life from doing. This is because life is all about learning what not to do. It’s about learning from your mistakes and constantly improving upon them to become a better ________ (fill in the blank).
Many of my greatest lessons came from my colossal failures. You see, trading is analogous to life in more ways than one. And failure happens to be an important component of both. In trading, if you can’t see and feel the failures you’ll never really understand how to overcome them in the future. The problem with paper trading is that you don’t learn to understand the emotional aspects of dealing with failures. And this is one of the most difficult hurdles for an investor to overcome.
Several months ago I wrote a piece titled “It’s only in being wrong that we can learn to be right”. I wrote:
“You might be wondering what in the world this has to do with investing? Well, it has everything to do with investing. Investing is psychological warfare. It is one of the last refuges of natural selection. The strong thrive and the weak die (unless you have superb banking lobbyists on the payroll). But we are ill-equipped to deal with the world of investing. Our primitive minds are built to survive first and act rationally last. In doing so, we often do what is detrimental to our financial health. That big tool inside our skulls acts on our primitive instincts and not the rationally developed processes that have sent the species surging to the top of the food chain.
The point here, is that learning from our past mistakes and accepting the fact that we are often going to be wrong will actually lead to a better skill set with which to deal with our future mistakes. The investor who accepts that there is no such thing as a holy grail in investing will soon realize that he/she must construct a portfolio that protects them from future calamity. And more importantly, through the use of past lessons we should all hope to create procedures to guide us during those times when our primitive mind tells us to react irrationally. You will be wrong. But it is only in being wrong that we can learn to be right.”
There’s no education like the real thing. Even if it costs you a few bucks. I actually paper traded when I first started and it was a complete waste of time. Executing an actual trade and executing one on paper are not remotely similar to one another. And I quickly found out that the two were dramatically different. What worked in a simulated paper game did not come close to working in the real world.
I opened my first brokerage account with $500 and I was prepared to lose it all. I did some crazy things now that I think about it. I even kept a journal of my strategy progression that I keep in my desk to this day. I read it and laugh at how far I’ve come since then. I would have never been able to do it had I not learned real lessons trading real money. In short, don’t waste your time paper trading. There’s nothing like the real thing….
Investing is one of those things where you need to just jump into the water and learn to swim before your head gets submerged. You don’t learn a thing sitting on the edge contemplating whether or not to jump….
Re the merits of learning by doing, there is evidence to support this in connection with “make work” or WPA type schemes in Europe.
Training is often offered as an alternative to actual work on these sort of schemes. But it seems that actual work yields better results. That is the subsequent employment record of those opting for work on these schemes is better than those opting for training.
That’s not to criticise decent paper qualifications, e.g. qualifying as a lawyer, doctor, etc. But the training on WPA type schemes seems to be poor value for money.
Cullen, I can’t help feeling what a lot of ‘traders’ are doing is speculating, not investing. You do know the difference?
We’re all speculators. Investors provide capital (IPOs, venture capital, etc). Stock exchanges are filled with people speculating. It’s just different timeframes and there’s little to no evidence that the guy buying and holding is taking less risk than the guy day trading (although one might be taking a more intelligent fee based approach)…..
Just do it. You don’t learn risk management if there is no risk.
That’s why those “stock-market-contests” are really annoying. There is nothing to lose so the riskiest (read luckiest) people win.
Cullen, why don’t you just start an account at http://www.youtualfunds.com, tell us your symbol, and then we can see for ourselves if you can make money on the stock market. I know you won’t, so we can just assume your trading pyschobabble in this post is meant to impress the amateurs.
Even though you’ve been here for some time now, you totally ignore the comments in which Cullen mentions he’s taking a short or long position on the market. And it seems he’s pretty good at it. I should know, because sometimes I was on the other side and it went horrible.
Just put some money with him and see for yourself
What do I need CR for? After reading and understanding MMT (to a degree) it all made sense and my investing improved 100%. If he wanted to start some kind of fund I would love to contribute to that end, but I really don’t need it. I’m doing just fine.
Thanx CR for all you have done.
“Give a man a fish and you have fed him for a day. Teach a man to fish and you have fed him for a lifetime.”
My results are audited and my personal acct has outperformed the S&P 500 by 125% over the last 5 years. I don’t claim to be the next Buffett, but I can and do generate very good risk adjusted returns. Just look at the last 3 years. My 2008 crash call and my flash crash call alone kept me out of the two biggest market declines of the last three years. I could have stayed in cash that entire time and done better than the market. These calls are all done in real-time and the people following them have seen me do it time and time again….
http://pragcap.com/discussion-forum?mingleforumaction=viewtopic&t=93
I have nothing to prove to anyone here. If you follow me for a little while and think I am full of it then go read someone else. I like to think I am helping and if you find my analysis unhelpful then go pick another free site to troll around on.
So, the 125%, that is in absolute returns, right (i.e. you are up 125%)? Otherwise, the S&P was at 1298 5 years ago, so beating it by 125% means being up 1.1% instead of .5%.
Honestly, not trying to be antagonistic, absolutely love the website and info, really the best so it doesn’t matter, but just curious.
Right, my total returns over the last 5 years are 125%.
You obviously don’t follow Cullen’s algo. He’s one of the only market timers I follow who actually seems to be able to time the market. I can’t remember a single time where he’s been wrong. And I know because I was long when he said he was getting short before the flash crash last year. I told myself I’d never take the other side of Cullen’s trades again.
Truly right ! Paper trading is not emotional, so you loose about 50% of the real feeling, and do not realise your mistakes. I use paper trading only for testing new setups during few weeks (like everybody I guess) and when I’m satisfied, I go live.
I’ll say that for beginners paper trading is useless, because they don’t take it seriously. No records, no taking down notes of what could have gone better, etc. But if you’re a beginner and just lost your shirt in real trading, you’ll pay more attention to your paper trading account.
Ironically, paper trading is the most useful *after* you have real trading experience.
Trading is mostly a phycological pursuit.
You can be the worlds best analyst / quant etc etc and never make a dime in the markets if you fail to control your reaction to the volatility you face every day.
Mastering you own inner demon can only be done when risking REAL cash and your savings / job is on the line. Paper trading, while useful, is never going to catch the myriad of emotional turmoil you will face when looking at a real loss.
The best advice I was ever given is to know the odds of success of any trade at any time (Paper trading / backtesting all help here). Place your bets with the appropriate stop when the odds are compelling…but most importantly accept that a drawdown of X is to be expected and not to beat yourself up over it. Often I think people dump good trades just because they cant handle a small drawdown.
[Obviously, unexpected /unexplainable losses need to be cut very quickly and you need to rethink your strategy!]
I love to paper trade!
It is there that I become the monopoly issuer of my own fiat currency and as such, I am never revenue constrained!
Losing trades? Margin calls? No problem!! A keystroke to my spreadsheet and my account is once again full to the brim.
I am careful never to lose more than my own paper productive capacity when I paper trade. Wouldn’t want to experience hyperinflation in Darrell’s world
The most important thing to do is trade real life, with a smallish amount of money- AND LOSE IT.
If you paper trade, if you profit on a real trade, you are worse off in the beginning, you have to lose, max pain the better.. Cause you’ll come back 50k times better, if you win to begin with you’ll just invest higher amounts and lose.
totally disagree. i don’t know how many people i’ve seen take themselves out the the game early, because they wiped their accounts out, by learning on the fly with big bets.
James,
That’s why you start out small. I started with $500. If you’re “learning” with your nest egg then you’re making a big mistake….There’s no reason why you can’t learn with $500 doing the real thing….
lol. $500 basically is paper trading.
i’d say paper trade, then start trading small, with an amount thats not going to freak you if you lose. build up some “house money” then gradually raise the stakes. keep a stop loss at about 2% of your total account.
The point is, you can’t learn to understand the markets unless you’re doing the real thing. It doesn’t matter if it’s only $500….
Tradestaton has a simulated account functionality with their platform. It trades in real time and is exactly like the real thing; except you risk no real $$. As such, one can take unlimited risk and suffer no consequences except to one’s ego.
But, it is an excellent way to learn the mechanics of trading in the real markets.
That’s certainly a useful feature. I’ve never used it. I still think you need to experience the raw emotion of losses though. That can only be experienced by really losing the money….But I am sure Tradestation’s platform is a good starting point….Thanks Darrell.
paper trading is still the first step.
I agree, there are other lessons to learn with real trading. Most of us have some limited capital, so if you are early on a trade and and are drawn down, do you pull out reinvest on a new idea or wait until the trade rolls your way.
Well said, Cullen.
Cullen,
Here’s the link to a great article which appeared in CNBC – somebody actually understands how the monetary system operates!
http://www.cnbc.com/id/43899646
Cullen: “Executing an actual trade and executing one on paper are not remotely similar to one another.”
Winston Churchill: “Play for more than you can afford to lose and you will learn the game.”
Really bad advice. Do paper trading and a lot of it. You’ll find out you need to let your wife or kids do the investing.
Cullen, implicitly, is boasting either:
1. Pretense of knowledge
2. Insider knowledge
We all know #1 is bogus, there are no patterns in the data. And #2 is illegal.
Quite a remarkable admission by a MMT maven. In other words, the existing “system” is plagued by #2. Apparently, MMT would be much the same.
Yes, I am either stupid, lucky or a criminal. Thanks for your contributions Hillbilly. It’s fun to see that you’ve been reading this website for a year now, visiting regularly, and you repay the author by insulting him. Nice.
Could you imagine Cullen as your kids high school teacher?
“Sonny, stick a kitchen knife into the AC power outlet and discover the laws of physics by doing!”
One more childish comment and you start getting treated like a child (ie, comments go into moderation with the other children’s comments). Don’t make me treat you like a little kid. We’re all mature adults here. Act like it. I don’t ask much from readers here except that grown men and women act like it. If you’re incapable of acting like a grown-up then you leave me no choice but to treat you like a child. Why is it so hard for some people to act mature on the internet?
If you loathe my commentary and perspective then give me the other side. Convince the other readers that I am wrong. I am wrong all the time. I accept it. And I love it when really smart people come here and prove me wrong. It makes us all smarter….Try it. You might be surprised at what you’ll get out of it….
I don’t believe there is another side. There is simply no way to prepare for the loss of one’s capital except to experience the loss of one’s capital.
And if one trades, one will have a losing trade or maybe even two.
Everyone is a star when paper trading. Not so much when the paper is their $$’s.
Hillbilly, I rarely get annoyed when I read most posts, but I have to say, your comments are irritating! (Which, with your psychological makeup, you might find rewarding to hear). If you engage in ANY kind of insightful inquiry into your “self”, you might question why you are posting comments that in no way further anyone’s understanding of the markets, MMT, or of life in general.
Good luck. I suspect your life at its core is not a pleasant one……..
Some people really do have to stick a knife in a light socket to learn or be motivated to learn. I am one. I hated economics. I always believed that if I was skilled at what I do for a living the money would come. It did come, but it also went out the other end through faulty investment advice, ignorance on my part as well as my advisors, predatory practices, not understanding the biz cycle and general laziness. When I came to my present job and city I was probably down 20k and a short way from retirement with not much set aside. Three things happened: 1. My brother needed my math help while he worked on his economics degree and I became interested in economics. 2. We both asked ourselves in late 2009 where all the money from the FED was going.(It certainly wasn’t being loaned so how could we possibly have inflation) 3. I discovered MMT and then this site and its very useful reading material. I was hooked, I started learning by doing and my investing improved dramatically due to a better macro picture. There has been at least one case where I got in and out of equities within one day of CR and didn’t know it till later when he made a comment.
You know:
You can lead a horse to water, but you can’t make it drink. You can lead a wh0re to culture, but you can’t make her think.
Maestro Cullen told your kids to plug the radio into the socket. Teaching by doing.
But you kids stuck a knife(which they aren’t allowed to have in school) in the socket. Apple doesn’t fall far from the tree.
Real Estate is all about location location and Stocks are all about Information Information.
Information is the most valuable commodity in the world.
When trading or investing with out it your odds are definitively better at the casino and at least you will get free drinks.
OOPS… Cullen my little comment above have nothing to do with a kind of follow up of “Hillbilly”. Its a coincidence since I was away from my computer and had not read it. Just wanted to make sure you Know that I was not insinuating any thing such as the disrespectful comment from the above ignoramuses.
paper trading = shadow boxing
It’s not sparring, and it’s not getting into the ring/cage to compete against a resisting opponent. But it has its place, IMO.
TPC Readers…stop defending and promoting CR.
Your allegiance to him and the site is fine. But the best you can do for him and yourself is to stop promoting his algo calls and his market timing prowress. If you really want to piggy back or leverage CR succusseful you’d keep your mouth shut.
If Malibu Surfrider beach was undiscovered and you were the only one surfing this perfect point break. Would you tell your friends? Maybe one..maybe another.. then he tells another and before you know it looks like Malibu today. Crowded and dilluted.
WE have a great secret(his popularity is spreading)Gem in CR- now stop promoting him. Less you end up putting undue pressure on his calls and or calling to much attention to them.
Lastly, why does it matter what trollers think? Who cares what they say as they troll on by the TPC? Why encourage them to stay with replies.
Now let’s all play a game called Cullen the Secret investor. There is one rule. When Cullen sends out his trading calls we all ignore bringing attention to him and we don’t tell others about him.(i guess that’s two rules.)
This made me laugh. Thanks.
Damn…hate doing this after sending…but the last anonymous Secret CR post was mine…Written like I always do..both complimentary yet slightly combatitive.(too many drugs)
Thanx for the feedback man(really) Most people want to help those who need it and help the country. I worry that so many do not know how the economy works and I worry about the damage that could do.
Forgot to log in.Sorry..not a fan of anonymous. Rather you love me for me or..practice patience when I get combative(I always apologize later)
I had a related discussion recently with someone who pretends to be playing poker but “without money”.
My take was it’s not poker. It’s just a game of cards with the same hands hierarchy rules. But it’s not poker -even if everyone gets the exact same cards at the same time the table won’t play the same way.
Not having a skin in the game means you are not playing the actual game. The game IS about the skin.
It’s like hoping to dream without having to sleep. You just can’t.
Similarly you are never paper “trading”. You are just paper “clicking on buttons”.
Trading IS having money on line.
I second everything you said Ivan
and do you really think any top poker didn’t learn poker by first playing for nothing?
JAMES- Go play for nothing if you want. Put no skin in. Tell us about how good you are at all this stuff from you computer.
We’ll be playing the real games. The ones you can’t hit the reset button on the nintendo when you die.
Let me say this..your right. Go play, live, invest in you safe paper world. no ones stopping you. it’s your life…go waste it and tell us how wealthy you are while you lay on the beach on your towel in front of my house
i’m just saying paper trading is the first step.
i’ve been trading since you were crawdad bait, son.
80% of traders lose money, and i’d be surprised if you were in the 20%.
Investors place their bets on a longer time line and are highly deliberative. Traders place their bets in rapid succession. Investors play chess by mail; traders play speed chess against the clock. Same game but very different styles and clocks.
Either way, playing the game with your own money is intensely interesting and at times scary. Paper trading is like playing poker without money bets; why bother killing time that way?
i can say don’t even think about trading with your real money before you paper trade and get a feel for how the markets work, demo some strategies, and get something good worked out. only when you are sure of yourself through play money practice should you jump in with your own funds, or you will lose it all if you plan on being an active trader. real talk
Nothing like a margin call to wake you up or puke your guts. Paper trading thats for Congress.
Riddle me this? Why would the Treasury be worried about paying bond holders if they are not revenue constrained?
Ben Franklin once said “Things that hurt, instruct.” Simulated trading has it’s place, but at best it helps you focus on technique. The real factor, and by that I mean 80% of the equation, is handling and managing your psyche. After a big trade where you make a month’s worth of money in one day, will you get cocky and complacent? Then take on bigger and riskier trades and lose 2 months of money in 1 day? How will you recover from such an event? What happens on your first draw down of 10,000 or 100,000 or whatever sum of money is significant to you. Are you going to rage and contemplate suicide bombing the floor of the exchange? Or, are you going to take that lesson and use it to make more money. That kind of emotional beat down can not be simulated by paper trading.