Paper trading, often called demo or virtual trading, is a way for people to practice trading without risking real money.
It’s done mainly for educational and research purposes, and is, in my opinion, the best way to get started since you don’t get penalised for the mistakes you make as a beginner (and you will certainly be making a LOT of them).
Now, there are varying opinions as to how long a beginner should stick with paper trading, that ranges from a “never” to “a year or two”.
Personally though, my suggestion for beginners would be to paper trade for no longer than 4 weeks.
Why? Because the lessons you learn from paper trading are going to be very different from the lessons you learn from live trading. In other words, your paper trading experience will contribute very little to the type of experience that matters.
It’s the difference between playing a computer war game and being on a real battlefield. It’s easy to remain calm and logical when there isn’t much at stake. But when you’re doing it for real, with your muscles screaming in pain, adrenaline coursing through your veins, bullets whistling past your head and explosives randomly going off around you, suddenly things aren’t as easy as you’d have imagined.
From an evolutionary perspective, it wasn’t too long ago that we were running away from lions, bears, and a big list of other predators that stood well above us in the food chain.
In those times, there was only one type of risk: the physical kind. If you took a risk and were unlucky, chances are that you’d be dead. (Things were simpler that way.)
If you were a caveman who liked to take risks, your life expectancy would very likely be much lower than average.
And so, natural selection gradually removed the individual risk seekers from our gene pool, leaving us (modern Man) with one particular trait that facilitated the survival of our biological ancestors: a strong distaste for risky situations.
The result of this, is that the majority of our modern population not only detests risk, but have a deep-rooted aversion of it.
Evolution Occurs Slowly
In a time when risky situations were often a matter of life and death, the tendency to avoid risk was a good trait to have.
These days however, human beings now sit on top of the food chain… and outside of the occasional mishap, we are generally safe from physical harm.
Think about that. In the span of a few thousand years (a mere blink in evolutionary terms), we have gone from being constantly worried about dying, to not even having to think about it.
The problem is, that although our situation as a species has changed drastically, our biology hasn’t. The aversion to risk remains deeply embedded in our DNA. We still react to risk (regardless of type) as though it’s a matter of life and death.
Fools of Chemistry
This is a big reason why smart people can (and often) do stupid things in the face of risk.
In the realm of trading, the risk of loss elicits a profound emotional reaction that can lead even the smartest academic to repeatedly make the most basic mistakes.
It’s not because he’s dumb… it’s just that he isn’t biologically equipped to handle risk in a rational way. The chemical reactions that occur in his body leads him to act like a caveman facing a life-or-death situation.
And so you see, trading isn’t just a mental challenge. It’s also a biological one.
The point is that most people aren’t naturally equipped to handle trading (i.e. a risky endeavor) in a rational manner.
To be a good trader, one needs extensive practice to handle irrational impulses.
Pain is Nature’s Way of Teaching You Something
When you touch a hot stove, the searing pain is a necessary ingredient to ensuring you’ll never do it again. It’s just the way we’re wired. If something doesn’t hurt, we don’t learn from it.
This is why I am of the opinion that retail traders should go ‘live’ the moment they are familiar with the trading platform and the basic mechanics of trading. The emotional training doesn’t start until you start risking something.
Of course, this comes with the caveat that people should only start ‘live’ trading with the smallest possible lot size. There’s a difference between setting yourself up to learn, and committing trading suicide.
Over time, as you start to make money, you should be gradually increasing your trading lot size just like how a trainee weightlifter would increase his load.
This incremental growth will help you build the emotional stamina to handle a growing trading account.