palantir are all these trades you’re talking about done with real money or just a simulator?
Once again, guys, no one is saying you don’t have to eventually put money to work to be taken seriously. People are saying that if you’ve never traded before, it makes sense to paper trade for a little bit before diving in with real money.
It is very true that managing the emotions of greed and fear is a key part of investing, and paper trading won’t teach you that. However, there’s plenty that can go wrong with investing that isn’t about greed and fear, so it makes sense to make sure that you’ve got those parts hammered out and working before diving in with real money.
How long should you paper trade? It depends on how complex your investment style is (more complex requires more practice). It depends on how long it is supposed to take for investment theses to pan out (longer implies longer). It depends on how much money you have available and can afford to lose on stupid learning mistakes that might be learned as easily through paper trading (not all mistakes can be learned this way, but many of them can). It depends on whether you think you are going to miss the biggest investment opportunities of your lifetime if you don’t use real money in the near future (hint: 100 year floods seem to be coming every 5 years or so, which actually means we’re due for one about now).
The analogy I like to use is a military one.
Soldiers will tell you that nothing prepares you for what real combat is like. Not reading, not training, not drilling. As Patton said: “'Cause when you reach over and put your hand into a pile of goo that a moment befor was your best friend’s face, you’ll know what to do!”
Is the right conclusion to stop training people, because drills are useless? The military doesn’t conclude this. Throwing untrained soldiers into combat isn’t about making better soldiers - it’s a desperate move by armies that fear they are about to lose everything if they don’t. Armies know that nothing prepares you for genuine combat, but they still need people who know what they are supposed to do under fire.
No, we still need to understand our weapons, how to use them. How we are supposed to act under pressure. Palantir’s right: it’s called discipline. Can you use your weapons under fire? Can you stick to your discipline when the market isn’t rewarding you? Can you manage your risk appropriately? Can you pull the trigger when you need to? Can you run when it’s appropriate?
Yes, you need to manage your emotions, but before emotions can even mess up your plans, you have to have a plan in the first place. If you don’t and haven’t practiced the drill, then all you are running on is emotion and gut feel. Why not drill and practice your plan on paper and see how it works before running full force into a market that is designed to eat you up in transaction costs, fees, and headfakes.
After 6 months on paper, maybe you’re ready for real money. A year would be better, but that may seem like a long time.
If you really cannot stomach paper trading, then by all means keep your position sizes small: say 1/4 what you would ordinarily place. That can give you a similar result. As you succeed, you can start to increase your positions to a regular size.
Nope, I fully stand by it. You can easily replicate the same conditions and emotional pressures that you face with real money. Try it. Set up a mock portfolio of 10k and give yourself the target of beating the SP500 for the next month. Add in trade commissions (you can do it on Google Finance). You will behave the exact same way. It’s a terrible idea to invest with real money unless you have a decent command of it. As bromion pointed out “finance is easy to learn, hard to master”.
Bchad’s right, the pressures of real money can be easily replicated here…it’s not identical of course, but how you react to the market turning against your positions can be quickly tested in a mock portfolio. In medicine students practice on cadavers, athletes have practice games, pilots have flight simulators, millitaries have training exercises. But in trading and investing, “you’ll never react the same way with real money”? Really?
there is no substitute to actually getting in the ring and fighting…every trainer will tell you sparring is problably the single most important thing for a fighter getting prepared (cardio is a given).
with that said, its wise to do a lot of pad work etc…
Ideally, the way you trade real money should match the way you trade on paper (unless your paper trading does not include real expenses like transaction costs, in which case there will be small differences). You will never know if your real discipline matches your paper discipline until you use real money. But at the same time, your discipline has to be a decent one to begin with if you are to expect any success.
On the other hand, you will never know if you are acting on real discipline or just emotions if you don’t have some kind of paper portfolio or model portfolio to benchmark yourself against. At the moment of any trade, we often find ourselves making rationalizations that sound logical. How much is based on emotions versus discipline is hard to figure out without a model portfolio benchmark.
So here are two suggestions:
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Figure out your rules and your discipline. At the very least, have a model portfolio in mind so you can compare what you are actually doing with what your rules and discipline say you should do.
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Paper trade until you’ve exectuted at least 3-5 transactions that your discipline requires (buys, sells, stops, shorts, using stocks, options, futures, whatever you expect to be using). For infrequently used transactions (maybe stops don’t happen very often), you can deliberately do things to make them more likely, just so you make sure you understand how the system works and what it costs you to do it. Those kinds of trades are less about having a benchmarked discipline and more about just making sure you understand how to execute trades correctly and understand what they cost to do (I would recommend against taking physical delivery of a pork belly futures contract, however, even if just for practice.)
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When you start using real money, start with small position sizes, maybe 1/2 or 1/4 the size you would ordinarily trade. As you grow more comfortable, up the position size to what your discipline indicates.
That was actually three suggestions. As you can see, I don’t really know how to count.
On my very first trades, I made two newbie mistakes 1) I sold with the wrong kind of limit order, so I got a bad fill, 2) I had a mistake in my position sizing algorithm (fortunately it made me take a far smaller size than I intended, rather than a far larger size). I was freaked out by all the numbers on my screen and didn’t have a good feel for which ones I needed to be watching at which times.
Fortunately, those two mistakes created problems in the opposite direction (#1 increased risk, #2 decreased it), but it sure made me pay attention to things better.
Interactive Brokers lets you run a paper portfolio. I forget if you have to have a funded account there, but I think you don’t.
ThinkOrSwim is another one that lets you run paper portfolios.
I ended up going with Interactive Brokers myself (for real portfolios). When I did my research, TradeKing was my second choice, but I don’t know if they have paper trading.
If the goal is to run money for others, then trading for your own account would be the appropriate way to practice. Kind of like the guy that found the vaccination for polio trying it on himself first. That dedication.
Investing and unique trading strategies are arts. Either you have the skill or not. If all it took was significant practice there would be many more consistently successful investors.
If you’re not confident enough to use real money you’re in the wrong business. Finance isn’t for pussies.
that’s real talk right chea…
del
Prop trading desks never let someone who has never traded before trade with real money. You are put on a simulator first until you prove positive consistency.
I’m not knocking paper portfolios as learning tools. But for a limited time. Plantir is suggesting they are exactly the same as normal trading. I’ve never met anyone in real life who actually agreed with that, so I find it hard to believe he does. But I’m convinced now – ‘do you bro’, but I don’t think its as simple as you think. Otherwise you’d be in real money by now, if it is no different. At least thats my opinion.
Not speaking from experience, but I think those prop desk do that so they can simulate the energy and the basic functionalities (how to make buy/sell orders in real time)…i don’t think they’re in that environment for long…
also prop trading is much shorter term in nature whereas long term investing is more about fundamental analysis and in some cases can take years for your thesis to play out…
its easy to simulate a stock price drop of 50% but to actually put money behind it is tough. most portfolio managers with years of experience fail to do this.
Doctors, soldiers, and pilots? If they go in unprepared and mess up, people die and careers end. Training for athletes IS the real thing in many cases, cause if you get your ass kicked in practice, you’ll be sitting on the bench or get cut from the team. In a worst case newbie trading scenario, you lose a few days of salary and your ego deflates a bit. We are not talking about professional money management here…
There’s danger in trading without real skin in the game since you can easily get a false sense of confidence and feel that the market is easily beatable. Especially, when you don’t think twice about doubling down on a stock down 50% etc. It’s like my little poker game that I have on my cell phone…started with $500 now I’m at $100,000, time to go to vegas?
that is very true.
poker without money is not the same.
IMO, there should be a distinction btwn investing and trading. If you’re investing, why not start with real money - the worst that can happen is you mess up, sit through a drawdown, collect dividends, and grow your equity through time. If you’re sim investing, you’re sitting in cash, doesn’t seem like a great use of money to me.
If you’re trading, it makes sense to try a simulator to nail down your strategy, but even then (as mentioned) it should be to figure out the mechanics of how to trade it - you should be able to tell beforehand if a strategy will or won’t work. STL is right, practice won’t help if you’re trading a -EV strategy (i.e. daytrading the sp).
palantir, I hope all of these trades you have been making were used with real money.
you have done quite well (certainly better than me).
Yes they were with real money. (The actual returns on the portfolio don’t look that impressive because I’ve been adding to my account every month rather than running it like a fund).
That being said, I think I used paper portfolios for about 3 years before I started investing with real money (I decided to wait until all student loans were paid before investing forreal). Best decision ever. Can’t even fathom the moronic positions I took back then. You need to spend a substantial time developing your skills and ability before you can invest.
On that note, I’ve been focusing on mature cash cow firms like MSFT, GOOG, PH…but I think I’m going to shift focus to smaller, “emerging” players. Basically invest in MSFT and GOOG while they are still emerging and gaining market share. Sounds easy right?
It’s like dating Kim K. Do you want to date her when she was an “emerging” talent, or…in her more “mature” years? It’s the perpetual debate between “youth” and…“experience”.
GOOG is a growth company to me. I think they’re just getting started.
I would like to find young growth companies too, but I am not smart so I usually can’t figure out what is going to happen.
I would be happy to date Kim at this point. Speaking of which, her butt got bigger.
Women age like cheese, men like wine.
Dating Kim would be like dating a stock that already hit its all time high and is on the verge of tanking.