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appC JWBK182-McDowell April 25, 2008 16:30 Printer: Yet to come
168 APPENDIX CThe best way to develop your trading skills is by paper trading, which
allows you to practice without the pressure of losing money. If you cannot
even be profitable paper trading, how on earth do you plan to be profitable
trading with real money and more stress?
As I mentioned earlier, some traders believe that paper trading is
useless because you won’t feel the psychological emotions that are
experienced when trading with real money. I strongly disagree with this.
In the beginning, you will find that, surprisingly enough, paper trading cre-
ates a similar emotional roller coaster as trading with real money—that is,
if you approach paper trading with the same dedication.
The deeper psychological and emotional aspects of trading your hard-
earned money can be worked on later, after you have developed your
trading skills. It is first better to have your approach developed through
paper trading and then work on developing a deeper trading psychology
over time.
Don’t be impatient with your paper trading. Allow yourself time to de-
velop your trading skills and approach. This is time very well spent, so no
short-cuts here.PAPER TRADING TEN-STEP PLAN- Design your trading rules and your money management rules.
After you have designed both your trading rules (either technical, fun-
damental, or a combination of the two), then write them down on pa-
per in a checklist format. Cover every aspect of your entries, exits, and
overall methodology. In addition, get your money management rules
written down in the same way. - Start to paper trade.Once you are clear on your rules, start paper
trading on the same time frame, financial market, and with the account
size you plan to work with when you use real money.
If you have the time to day trade, it is best for you to paper trade
your favorite market. Day trading will shorten your learning curve be-
cause you will trade more often and gain more experience for a given
period of time.
See if trend trading, scalping, scaling in or scaling out suits you.
Through trial and error in a safe, paper-trading environment, you will
be able to determine if you need to adapt your rules. - Evaluate your performance. Keep track of your paper trad-
ing results and approach this as if you are trading with real
money. Use the Trader’s Assistant Record Keeping System (see
Chapter 12).