The usual opinion is that those who want to start trading the financial markets better start trading on paper first. I disagree, but only when certain conditions are met.

Paper trading is pretending that you are trading. You make decisions on what you want to trade, when you buy it and when you sell it. You keep a record in real time of the profits and losses you make with these fictive trades. There are lots of tools out there that make it easy for you to do this.

However, what good does it do you?

Wrong Emotions

Here are two good reasons why trading paper is a waste of time in my opinion.

1) Any period for trading paper is too short anyhow

To really test a trading system, you need to test it for many years, maybe decades. What is the point to trade paper for a few days, weeks or months? What have you really learned during that period? You learned absolutely nothing that you cannot learn faster and better by just studying, testing and analyzing.

2) You experience the wrong emotions

Trading is all about following a systematic approach and controlling your emotions and impulses. The only emotions you stir up when trading paper is regret when you pocket fake profits and relief that your losses are not real.

You do not experience any pressure and doubt on if to follow your system or not after a few losses. You also do not face the greed that creeps in after a few wins and that encourages you increase your position size beyond what you can afford.

“The only people who should paper trade are those who plan to trade without a well tested system and just a bag full of gut feeling. They should trade paper till eternity.”

But what is the alternative?

Start Trading Small

Here is a two step alternative to paper trading:

1) Prepare

Before considering making any trade, make sure you have a system that is tested through and through. If you want to know how to develop and test a trading system, read Kaufman’s “New Trading Systems and Methods”.

2) Start small

Once you have a system, start trading it small. Start with “charity” money. Allocate a small part of your savings as trading capital. You should not lose any night of sleep if you would lose all of this capital. And then make sure that each trade has a position size that is a small percentage of this capital.

Only after substantial experience with your system and actually trading small, you can start increasing your positions.

What if you do not have enough “charity” money? In that case, keep saving and grow your savings by investing it simply and wisely before starting trading with leverage.

And if you do not want to spend the time and effort to develop or source a good trading system, don’t waste your time with paper trading. Start doing something useful.

How long have you been paper trading before you started to lose real money?