"Isn't paper trading good enough?"
By Dave Mabe
Several traders have gone through my Better Backtesting course. One of the lessons describes going from backtesting to trading live.
It recommends paper trading first, then trading live with tiny size to start gathering data.
Rick H. replied and asked a good question (name used with permission):
Rick H.:
But wouldn't paper trading alone accomplish the same thing?
Dave:
I do believe paper trading is underrated, and it's a nice stepping stone towards trading a strategy live.
But it's not going to give you the data that real, live trades will give you, even using a minuscule size.
Paper trades are theoretical.
Live trades are real.
There's a big difference.
Real trades are going to get filled (hopefully!) in the live market with actual market participants.
It's like getting feedback on your strategy from the best traders in the world in real time.
Skipping the step of trading with small size is a big mistake.
That's where the real learning starts happening.
When traders talk about how much "tuition" they paid to learn a lesson, they almost always could have paid far less by trading smaller when they just started trading their strategy live.
But does that mean that paper trading has no value?
Paper trading is very valuable - especially for newer systematic traders.
Why?
Because watching trades form in real-time - even if no money is on the line - gives you an insight that a static backtest just can't give you.
You start understanding the mechanics of how bars form, how and when orders get entered, and it starts bridging the gap between the theoretical and the real world.
And you can do it while paying zero "tuition."
Thanks for the question, Rick, and for sharing with the group.
-Dave
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