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Paper Trading Can Pump You Up, But It's Not Real Print E-mail
General Investing Articles | Written by Robert Prechter |

Paper Trading Can Pump You Up, But It's Not Real

When a baseball player in his late 30s hits the ball harder and more often than he did in his mid-20s, none of us believes that's "normal." The latest news about Barry Bonds' alleged steroid use strongly suggests that it helped pump up his unprecedented hitting statistics since 1999. Sports Illustrated just published the new evidence from a book written by two San Francisco Chronicle reporters.

What's it got to do with trading stocks? Just this: paper trading is like training with steroids. You can pump up your profits just like athletes can pump up their results. But neither one is real. What's real is to trade stocks with real money.

You may have already experienced what your emotions can do to you when you are trading with your own money. Or you may be trying to learn how to steel yourself against your emotions when you begin trading. Either way, Bob Prechter talks about his favorite training method for traders in his own book, Prechter's Perspective. Read on to learn more about why experience is so important to traders.

Bob Prechter's Six Secrets of a Successful Trader

1. Find a method. 2. Be disciplined. 3. Get experience. 4. Accept responsibility. 5. Accommodate losses. 6. Accept huge gains.

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Getting experience seems to be all about learning how to deal with your emotions when trading. Emotions are always harmful?

Bob Prechter: Once you get emotional, your objectivity decreases dramatically. If it were not for that impediment, normally intelligent people would make money continually via trading. Obviously, that is not the case. Beating the market requires a transcendence of emotional involvement. That is not to say you must deny your emotions. Quite the opposite. You must yank them out of your unconscious and view them in the cold light of reason. Then you can devise ways to deal with them.

And beat them. How is this accomplished?

Bob Prechter: The first step is to try to invert your emotions. Don't use a market rise as a reason to buy and a drop as a reason to sell. Take each move as a potential opportunity to do the opposite. That way, you're more attuned to buying low and selling high, which is the opposite of what everyone else does. Eventually, it will become a habit. While this change will not solve the investment problem, it deters you from making the worst mistakes.

Is there any way to ease into the experience? To take your method and discipline and put it to the test without risking your neck?

Bob Prechter: Before trading real money, satisfy yourself that your method works. Paper trading is useful for testing methodology. Some people advocate it as a learning tool, but it is of no value to learning about speculating with real money. Paper trading omits the emotional factor, which is precisely the obstacle that one must overcome to be successful. In fact, it can be detrimental by imbuing the novice with a false sense of security. He or she may have 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.

Has any specific trading experience decreased your trading success?

Bob Prechter: Yes. My first trade in 1973 was wildly successful, and I was hardly wrong in my first six years at it. Then I had a big trading loss in 1979, and that taught me more than the wins. The best way to develop an optimal state of mind for trading is to fail a few times first and understand why it happened. When you start, you're better off speculating with small amounts of real money. Using large amounts will bankrupt you early, which, while an excellent lesson, is rather painful. If you want to be a trader, it is good to start young. Then when you lose your first two bundles, you can gain some wisdom and rebound.

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