Hi guys, hi from Andrea Unger.
Paper trading on a demo account.
Does it make sense?
This question often comes up and yes, it does make sense.
If you open a demo account where no real money is involved, you can actually test your skills.
This applies to both discretionary and automated traders, the discretionary trader will test his or her setups, his approach, and the systematic trader will be able to put his strategies at work.
This means that, after all the backtest procedure, you can also test how the strategy really works.
This helps not to discover more, but to find out if there are some software bugs in your strategy, which is very important to discover.
Either software bugs due to the infrastructure of the software which has some limitation, or software bugs due to a bad script.
The first kind of example is if you build a trading system based on Renko bars, it applies wonderfully in backtesting.
When you go live you understand that it doesn’t really work the way it supposed to do.
So paper trading absolutely yes, but there is a “but”, it does not put into the game the psychological aspects or limitations that you might have unless you are a pathological case.
Just to mention this, some years ago I happened to participate to a video game about trading where the one who was getting the highest balanced in five minutes or so, was winning some prize, I don’t remember what prize.
I remember I was playing this game, with this virtual money, and I was applying some principles of money management to keep risk under control which was crazy because I had to risk 100%.
I mean, that was a game like a lottery and I had to play at the maximum speed but because of my mental limitation I was keeping risk under control also in that case, obviously I did not win the prize, but apart from these cases, I believe that there is no reflection of real money trading in demo trading.
You have to be aware of this, which means your results or the eventually positive results you see on the paper trading account don’t mean necessarily you will be successful as well with real money.
Be careful, pay attention to this, because it might play some tricks if you don’t consider this under the right perspective.
Paper trading yes, you can test your stops, you can test your script, your software for automated trading, but hardly you could test your psychological issues in trading.
It’s like an athlete training very well, but then in the competition, he fails because he does not have the psychological strength to withstand the stress of competition.
The same thing is when you put money from your pockets into the game.
In this case, the only thing you can do is to start very small and to trade what you can afford to lose easily, the losses which are normal cash flows in your standard day by day life, this is the only thing you can do, start small.
In any case, yes, do paper trade to get knowledge, to get more let’s say comprehension of the markets, to understand how much a move means in terms of money, all these are things you can learn.
Your psychology is something that comes later on, and that’s a different matter you have to face when you put real money into the game.
That’s it, ciao from Andrea Unger.
See you next time, ciao!