Paper Trading Is NOT What Will Teach You To Trade

Paper trading is only useful for the testing of your methodology.

By Editorial Staff

This is an excerpt from Elliott Wave International’s free Club EWI resource, “What a Trader Really Needs to be Successful” — a classic Special Report by EWI’s president Robert Prechter.

… 3. Experience. Some people advocate “paper trading” as a learning tool. Paper trading is useful for the testing of methodology, but it is of no value in learning about trading. In fact, it can be detrimental, by imbuing the novice with a false sense of security in “knowing” that he has successfully paper traded the past six months, thus believing that the next six months with real money will be no different. In fact, nothing could be further from the truth. Why?

Because the markets are not merely an intellectual exercise. They are an emotional (and in extreme cases, even physical) one as well. If you buy a computer baseball game and become a hitting expert with the joystick while sitting quietly alone on the floor of your living room, you may conclude that you are one talented baseball player. Now let the Mean Green Giant reach in, pick you up, and place you in the batter’s box at the bottom of the ninth inning in the final game of the World Series with your team behind by one run, the third base coach flashing signals one after another, a fastball heading toward your face at 90 m.p.h., and sixty beer soaked fans in the front row screaming, “Yer a bum! Yer a bum!” Guess what? You feel different!

To put it mildly, you will find it impossible to approach your task with the same cool detachment you displayed in your living room. This new situation is real, it matters, it is physical, it is dangerous, other people are watching, and you are being bombarded with stimuli. This is what your life is like when you are actually speculating. You know it is real, you know it matters, you must physically place orders, you perform under the scrutiny of your broker or clients, your spouse and business acquaintances, and you must operate while thousands of conflicting messages are thrown at you from the financial media, the brokerage industry, analysts, and the market itself.

In short, you must conquer a host of problems, most of them related to battling powerful human emotions, in order to trade real money successfully. The School of Hard Knocks is the only school that will teach it to you, and the tuition is expensive.

There is only one shortcut to obtaining experience, and that is to find a mentor. Locate someone who has proved himself over the years to be a successful trader or investor, and go visit him. You will undoubtedly find that he is very friendly since his runaway ego of yesteryear, which undoubtedly got him involved in the markets in the first place, has long since been humbled. Observe not only what he does, but far more important, what he does not allow himself to do. This person does exist, but it is hard to find him. He will usually welcome the opportunity to tell you what he knows.