Trading on a simulator (aka ‘paper trading’) is highly overrated. I frequently tell people they need to get off the sim as fast as possible. It offers an illusionary blanket of security which is actually counterproductive. No one trades the same way on a sim as he does for real money.
The idea behind the simulator is that you can learn to trade while not risking anything. Once you become profitable on the sim, you can then open an account with confidence. Since you have already shown that you can make money on a sim, you think you should be able to make money live. All you have to do is trade the same way you did on the sim.
There are multiple problems with this belief. I liken it to learning any type of sport. You can study form and strategy and technique in boxing all you want but you will never learn what it’s like to fight for real until you step in the ring. And that is an entirely different world. Punching bags do not punch back. Opponents punch back really hard.
You should trade on a simulator for, at most, maybe a month. It is a good tool for learning how to use your platform. You definitely do not want to make mousing errors and have issues with placing and canceling orders or adjusting quantity, etc. You will begin to get a feel for how it all flows together and you will become accustomed to staring at the blinking numbers all day. Once you feel like you can effectively place and manage trades very quickly and you know what you are seeing on the screen, you should go live.
What people often fail to see is that you do not manage losers nor winners the same as you would if you were trading for real money. It’s very easy to say, “I would have done this” or “I would have done that” when nothing is at stake. It’s another story when you’re sitting in a trade which is in your face and you know that every tick is costing you x amount of dollars and you’re second guessing your judgement and high on adrenaline.
Sim trading – You think you see a setup. You take the trade and the plan is that you have a 4 tick stop loss. You watch it move against you. You don’t actually take the 4 tick loss. It ticks 5 against you. Then back to 4. Then back to break even. Then you’re a winner. Easy as it gets. You think, “I was early but I read it right.”
Real trading – You take the same trade and you bang out for a 4 tick loss because you know that not taking the 4 tick loss can quickly lead to an 8 tick loss. Then you cuss when it comes back to your price. Or you quickly realize that you’re on the wrong side and you bang out for a 2 tick loss, then see it pausing, think maybe you were a little early, get back in at a lower price and make back your 2 ticks plus a few more. Or maybe you don’t even take the trade because it’s actually not a great setup. Or maybe you don’t take it because you’ve already had a good morning, you’re up money and you want to go do something else with your day. If you lose your profit, you know that not only will you not go do something else with your day but you’ll most likely sit in front of your screen for the next four hours until the market closes and probably throw good money after bad.
Result – On paper, not only did you learn a bad habit but you were also rewarded for it. Not adhering to your stops in real life is what leads to the poor house. In real life, you learn to be risk averse much faster because every real dollar lost is a dollar that could have been spent on something far more fun than a video game which sends you into spasms of rage and depression.
Sim trading – You’re in a winning trade which is 6 ticks in your favor. You have a projected profit target of 10 ticks. You can see the momentum in your favor has stalled but you still sit through thirty minutes of chop and watch your trade retrace to become only a 3 tick winner over and over again before the market finally goes to the 10 tick goal. Yep. You were right. Made 10 ticks.
Real trading – You get a fast 6 tick winner and while you think the market may eventually go another 4 ticks, you know that it’s probably going to chop around for awhile before it does and you’re not going to risk your 6 ticks to make another 4 ticks in this scenario. Especially when you can clearly see that the momentum has stalled. You take the 6 ticks.
Result – On paper, you made 10 ticks. In real life, you made 6 ticks. Or, in real life, if you had initially decided to hold through some chop, you may have actually only made 3 ticks because you may have decided to book the profit on the first pullback rather than risk watching it go all the way back to break even and possibly making nothing.
Simulators can also be gamed. There are always inherent flaws with them. One of which is that you usually get unrealistic fills. So a guy thinks he can scalp ticks all day long by working the bid/ask but in reality, he would never get 90% of those fills.
Many prop firms require their new traders to trade on a simulator until they hit a certain level of proficiency. This is such a BAD idea. And the proof is in the multiple emails I’ve received over the years from traders who had to try this route as well as my own experience with simulated vs. live trading. The guys who run most shops in Chicago do not keep new traders on a sim for very long. In the firm where I worked, we were on a simulator for three days. I kid you not. Then they gave us a one lot and a daily loss limit and said, “Go to it.” The management understood this because most of them had some level of success trading for themselves. You can’t learn if you don’t take some beatings. Every person hit his loss limit on days one and two. Every new recruit ever hired repeated this experience. That’s how it works. By day three, some people begin to figure out a few things even if it’s just, “I’ll stop at 75% of my loss limit today rather than hit it again because I obviously don’t know what’s happening and there’s no point in going three for three limit down.” And that lesson in and of itself is a great lesson to learn. There is no point in hitting your limit if you don’t know what’s happening or are making bad reads. Stop the bleeding while you still can. Live to fight another day.
Here is an email I received from a trader that was working for a prop firm which uses sim results as a way of gauging whether or not someone should go live.
“I have finally gone live today and what a Baptism of Fire it was for me. I was completely unprepared for how much of a different beast the live market is. I was stopped out for the day at 08:30 am. That’s terrible.
The fills and slippage took me and caught me completely unaware. I got slippage on fills and my stops. Also it feels like the live market moves a lot faster than the Sim.
For the last 2.5 months (on the simulator) I have been on a good solid run with something like 5 down days in that period and they have all been very small down days. No bigger than 6 ticks. Whereas my winners have been 10 ticks plus consistently.
Wow. My head hurts from this eventful morning.”
The rest of his first week went pretty much the same way. Which is normal. He had actually been on the simulator for longer than the 2.5 months he mentioned. It was just in those last 2.5 months that he attained the results the prop firm required. You see how well the sim results translated to real results.
You will learn more in five days of live trading than you will learn in five months on a simulator. As is illustrated by this trader’s email. And I’ve read a lot more emails just like this one.
The idea of keeping a trader on a sim for three or four months or longer boggles my mind. Very few people turn the corner in this business in less than six to eight months AFTER going live. It can happen but it’s rare. Like I say, it’s a new skill which has to be developed. If you keep a guy on a sim for six months, you’re basically wasting your time and money and he is also wasting his time and the money he had saved to cover living expenses while he’s supposed to be learning. He still has to go live and once he goes live, he’s probably not going to be consistently profitable for six months to a year so why delay that learning process by keeping him on a sim for months? It’s not going to help him in the live markets. I think many people who run prop firms fall into the same trap as rookie traders when it comes to this subject. The managers think they can risk very little to hopefully make a lot but they do not realize they are sabotaging themselves.
There were guys at my firm who were down over $30,000 before they turned the corner and became highly profitable traders. You can’t make it if you’re not willing to risk it and you should know going into it that your guys are going to take some hits in the beginning. It’s inevitable and part of the learning process. There’s no way around it.
So if you’re reading this and you run a prop firm, you may want to try looking at it from a different perspective. Just sayin’.
If you are an individual trader looking to make progress as fast as possible, get off the sim and get in the real game. Don’t be scared. Don’t be stupid about it either. It’s fine to be cautious. Do not go wild by doing 200 round turns a day because you think the more you trade, the more you will learn. That is true in a way but you still have to acquire the right habits and skills. It’s not just about non-stop firing all day long. You still have to be selective about your spots and manage trades correctly. But sim results will give you a false sense of confidence so don’t fall into that trap.