Paper Trading Part II - Keeping the Discipline
In my first blog about paper trading, found here, I described what I thought the advantages of paper trading were. If you agree that paper trading is a good idea, you'll want to read about my views on keeping the discipline. An undisciplined paper trade does you little to no good.
After my first blog, a few alert readers pointed out that paper trading cannot prepare someone for the world of trading because they won't be hit with the emotional highs and lows if they aren't losing/making real money. There is definite merit to these statements, because losing $5,000 in fake money doesn't hurt nearly as much as losing $5,000 of your own hard earned money. Here are a few disciplines to keep in mind to make your paper trading more effective.
1) Be realistic with your investments
If you have $5,000 to invest, don't give yourself $100,000 in paper money. There are different investment and trading strategies based on how much money you are working with. Remember, paper trading is supposed to be testing your strategies, so you need to be realistic with how much you invest.
2) Take the hit hard
If you lose a big chunk of change, take it hard. Get your emotions going by imagining how you would feel if you lost that much of your own money.
3) Learn from your mistakes
When you lose money, don't chalk it up to bad luck. Take a long hard look at your decision process in getting involved in the trade to begin with, and figure out what you got wrong and/or overlooked. Did you not factor in commission costs? Did you not follow the technicals and play a hunch? Did you forget to look at the ever-so-important insider trading? Learn from your mistakes, and don't make them again.
4) Make sure you're right before putting real money on the line
You can pretty much count on your real money trading not going as well as your paper trading, even if you hold to the strict disciplines I've laid out. Therefor you want to make sure your strategy works before putting your money on the line. This is the point of paper trading.
I would argue that you should get 70% of your trades right per month for 3 straight months before you put real money on the table. If you get 70% correct for 2 months, then 65% correct the third month, start over! You need 70% for three straight months. This is the standard I use, others may have differring opinions.
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