Greetings traders and welcome back.
Thank you for joining me again.
Chris here, bringing you another Survival Guide.
Today's subject will be paper trading, and I'm not talking
about literally trading sheets of paper back and forth. Instead,
I'm talking about something far, far more valuable. Paper trading
is something that I strongly recommend all of my traders
who are currently attempting to pass the Gauntlet Mini and
become a funded trader, which if you think you have what
it takes, make sure you check it out. Paper trading is
something I recommend all of them do before they take the
Gauntlet Mini to increase their odds of success.
Even after we pass the Gauntlet Mini and achieve our goals,
as we continue on our trading career, it's important to keep
paper trading as part of our arsenal, it's something that we should
always be using. We're going to talk about exactly what paper
trading is, as well as some of the benefits and how it works as we get going.
Before we do, take a look at the chart right now. Does
anything seem out of ordinary in comparison to the charts I'm regularly showing?
There is one key to finding difference right now, and you may not even see it.
The fact is, this is actually switched over to my simulation
account. That means, I can execute positions on the chart
right now with the real price of the E-mini S&P 500, just
like I would with real money, but I stand to lose absolutely
nothing, only play money.
Without further ado, let's dive on into it.
Paper trading itself has been around longer than the advent
of our beautiful blessing of internet-based trading.
The idea was, if a trader was interested in trading a stock,
what they could do is write down on a sheet of paper that
they were interested in say, purchasing a share of say Coca-Cola,
at a price of hypothetically say, $10. Then at
the end of the day, they could take that share price and
compare it to where the market actually went, and they would have
an idea if they were successful with their speculation about
where the market would go, or if they weren't. By the process
of literally using paper, they were able to give themselves
practice without any risk. In today's day and age, we
are blessed with technology that allows us to literally do
the execution process in the same exact manner that we would with real money,
but instead, we aren't using real money at all.
The fact that paper trading allows us to experience trading
without risking a single penny is extremely powerful.
It's giving us a very good, healthy ratio where we can gain
knowledge without the risk of financial burden or potential
despair should we do something wrong during our learning curve process.
Like we said, the concept of paper trading itself,
it has definitely evolved over the last few decades and become
far more digitized. Now as traders, we don't need to use that
pen and piece of paper method, which is so archaic in today's
day and age. Instead, we can use platforms to either test
out a particular platform and see how their execution process
feels to us, or just to trade in general on a platform the
same exact way that we would be doing if we were literally
trading live online in the same manner, but with risking no
money, only an imaginary set amount of money. We can see
numbers come, we can see numbers go, but we're not really
actually risking anyone's capital. Not ours, not anyone's
for that matter, and that is what gives paper trading such
a powerful, powerful value.
Can you feel it? Can you feel the power? The pump growing. That's
because we can gain that pump from paper trading. This
is because most people grow up to admire certainty. They
like the straight and narrow. They like the consistent path,
and that's because most skills that we learn in schools have
hardly any ambiguity to it.
It's a scenario where most jobs, 2 + 2 always adds up to 4,
there's really no crazy expected outcome
aside from 2 + 2 will always equal 4.
However, when we're trading, it's dealing with uncertainty
and risk all the time. Professional traders who come from
a finance background are often trained to quantify uncertainty,
most of which, most retail traders do not have any clue about
how to deal with the stress that is part of the parcel of
dealing with the risks of being a day trader, which is quite odd indeed.
Just knowing the information, and knowing the math, and knowing the
process is only half the battle. We have to be able to deal
with those emotional aspects involved. When we use a paper trading account,
what does it do for us?
It allows us to continuously expose ourself and kind of
desensitize ourself to the uncertainty and the risks that
we might have an aversion into being around. Things
that might scare us, yet when we use that paper trading account over time,
it becomes normal to see large numbers going and coming
and going and coming, and not be overly scared or emotionally
biased as a result of those large numbers that we're seeing
going. We can use that paper trading account to explore our
comfort zone, and we can then in turn become confident in
our ability to trade and it can help us become profitable
in the long run. That is the idea, and one of the beautiful
aspects about paper trading is that confident boosting quality
that it can give us as we use it over time.
There are a great number of benefits that can be associated
with a paper trading account,
but the ones that I really want to focus on that we're already
talking about, are ones like this where we can expose our
self with a paper trading account to a wider comfort zone.
That's the idea that gives us the ability to go into uncharted
waters without that uncertainty or risk that is there, that is
kind of like we were already talking about. An example of
this would be, if we were to say that we had a strategy that
was treating us well, but we weren't getting a lot of trades from it.
Say we were used to looking at weekly charts, and we had
a strategy that employed a 200 period moving average and
a 50 period moving average, and we were doing something along
the lines of swing trading on a higher time frame, which wasn't
providing us a large number of trades.
Now, there's no obligation to trade more, and as a matter
of fact, a lot of traders will say the less you trade, the
better you are, but the fact of the matter is, there is such
a thing as trading so little that we're really not finding
a great opportunity to increase our profitability potential.
Say we wanted some more trading opportunities, and we
wanted to go about catering this strategy that we're already
using, and seeing how it would do on a shorter time frame with
the smaller moving averages that would probably be, you know,
correlated to it without risking any financial capital, any
real capital. We could do that with the paper trading account.
We could take this rule set and experiment. We could drop down,
instead of a weekly chart, we could drop down to say,
maybe a 6 hour chart, and that would be a pretty big step
coming from a weekly chart. Instead of a 200 and a 50, maybe we
take a look at say, a 50 coming along here, and maybe a 20.
Just giving us some ideas here.
Well, we can employ the same process that we were doing over
here on the higher time frame, and it may or may not work
because it is in term a different time frame, but it gives
us the ability to find out if it is going to work without risking anything,
so it lets us explore our comfort zone.
Also, something else that paper trading does is it can help
us earn the confidence we need to deal with the stress while
we are trading with that paper money instead of the live
funds. This is something that is very real. I see traders all
the time struggle with dealing with the emotional triggers
that are associated with live money. Trading with the paper
money account can help us get used to seeing large numbers
come and go, like we discussed, without us feeling so emotionally
connected to it, which can in turn hurt our trading. Also,
we can test our strategy to see if it's viable on the market,
which is somewhat similar in nature to what we were talking about up here,
bu this is just the idea of using any old strategy, not scaling it down. Up here,
we were talking about using it to scale down, something scaling
down to a smaller size so we can get more trading opportunities potentially.
Down here, we're talking about formulating a fresh strategy, which is
something that we absolutely can do with the trading
strategy where we can you know, see what this rule set does
when we apply to the actual markets.
The idea that we can match our paper trading account to the
size of the account that we currently trade with live, or we
plan to trade with live if we are a new trader, is one that
should definitely not be taken lightly because it can be
both a positive and a negative, and we're going to talk about both of those.
If we were to trade with a paper trading account of, say
$100,000, there's a couple things that would start happening
if we just went down the textbook definition of how to trade
where we were using tight money management, and
never risking more than 1% of our account at a time.
Well, 1% of a $100,000 account is still $1,000
We still have the ability to make quite a large amount
of money with relatively low percentage risk.
That is something that we can get used to in the paper trading
world. Then if we switch over and we're not as financially
well off as our paper trading account made us feel, and we
come over here to where we now only have a $10,000 account, but it's real money,
we might feel like we want to risk $1,000 because we're desensitized
to the amount of $1,000 from trading on the paper account.
In reality, $1,000 of a $10,000 account, because we don't
have as much money of real money as we do with play money,
is 10% and that creates for a very dangerous situation.
There's good and bad sides to this. On the positive side
of this coin, becoming desensitized to a monetary value
while trading can be very, very beneficial in the
fact that we're not being emotionally influenced by the amount
of money that we're trading. That is good, but we don't want
to become so desensitized or so addicted to a specific number
like the first case scenario here, where we are risking more
money than we need to be risking on a percentage basis because
we're used to a larger physical number.
There is a positive and negative side of the coin, it's just all how you use it.
Once again, we want to desensitize ourself to the scary
emotions that are attributed to trading financial, you know
real money, but we don't want to desensitize ourself so long
that we're holding onto losses because we no longer have
any real value of what money is because all we know is this,
you know, arbitrary paper trading number over here.
Realistically, it's going to come down to what type of
responsible individual you are and
how you make it, because you can gain from this and you can
also hurt yourself from this if you go and do it uneducated.
You've probably heard about back testing, which is absolutely
an essential process of finding out if a new strategy we're
working on, or currently employing, has worked in the past
to give us an idea of what to expect in the future.
This is one of the beautiful opportunities that we can employ
when we're using a paper trading account.
The problem is, most of the ready-made trading systems
that you might find when you search Google are created through
something called curve fitting. Kind of a hindsight bias type
of way. Some people often refer to it as a type of repainting effect as well.
We do not want to be duped by a magic system that is curve
fitted. We want to avoid the curve. Trading with a demo
account in real time is called forward testing.
This is the process of employing an active strategy that
we want to use, but we're doing it with real market data instead of
going backwards and seeing how it would have done, which is arguably the most
valuable research information that we can do for any strategy.
It's called forward testing.
It's always better to test our strategy or system that we're
using out with paper money, of course, instead of risking
even pennies, which some traders argue is the way to do it
by just switching to say, a micro E-mini account.
But why even do that if we can do the same darn thing on
the same market without even risking pennies? If your goal
is to be a professional trader, then we need to employ professional trader habits.
That means we want to spend the majority of our day paper
trading if we are employing new strategies.
That means that we want to trade a system, not a specific
trade in general, which means we have a process that we are
using, something that is measured and calculated, and we also
want to seek new methods to improve our current system.
We don't want to just become satisfied just because
we are doing somewhat okay, or marginally profitable.
We're always trying to refine the process to be the best
traders that we possibly can be. Now, when we look at a novice
trader, there's a lot of different things that are going on over here
that is quite comparable to the casino analogy where a professional
trader is like the house in a casino. It's always using a calculated
edge with a logical bias to come up with a particular outcome,
even if it takes a longer period of time. The novice trader
on the other hand, is more like the gambler at the casino,
who is coming in to give money to the professional trader
because they are coming in to make money in a very fast process.
They're not doing anything with any sense of real rigidity
to it, and they can't wait to start trading live, and they just dive right into it.
They don't bother using a paper trading account to
experiment with any new strategies. They worry about
a single trade so much that it messes up their next trade,
and they often expose themselves to more risk than they need
to, and on variety of ways, one of which is not using a paper trading account enough.
Once again, the idea here is be like this guy, don't be like this guys.
In conclusion, paper trading accounts and live trading accounts
are best when coupled together.
We can't be purely a paper trader because if we want to be
a professional trader, who's heard of a professional demo
trader? That sounds ridiculous.
If we want to be a professional trader, we also don't
want to go about that process through the costly experimental
with real cash process that many traders do unfortunately,
because it's going to potentially bankrupt us before we gain enough knowledge
to actually be able to produce the results that we want to
produce. Both of them are very, very valuable in their own rights.
It's all too often that I hear traders say that, because a
paper trading account is like 98% of a live trading account,
they don't want to use it because of that final 2%
of difference, that psychological attachment to the real
money value that a live account draws. They feel that because
the paper trading account doesn't provide that, that the paper
trading account is in essence
completely useless, and that to me is just ridiculous.
There is value to be had there,
even if it isn't exactly the same, there is still plenty that can be taken away,
just like we talked about. I appreciate all of you joining
me again for this discussion on paper trading.
Please make sure you click the like and subscribe button
below, and if you get real good at your paper trading skills,
please make sure you check out the Gauntlet Mini because
I need more traders by my side.
Thank you everybody, I'll see you soon.