IMHO: Trading real money with great discipline day after day is very difficult. Paper trading with great discipline is even harder.
Paper trading correctly is extremely difficult, and much more rewarding than making real money. This is why I will charge you $10,000 in real money to actively trade a paper account worth OVER ONE MILLION PAPER DOLLARS!!!! I can take 100 traders at this time, and I will even show you some paper trades!!!
Paper Trading is pretty important. My prop firm starts off all trainees with paper trading before they can trade live. It's a good place to come up with your own strategies. Then Live trading is where you put your psychology to the test to see if you can execute your strategy as you have planned. Paper trading I believe is an essential part of your trading process.
I think Paper trading has limited value of getting into certain order like a checklist. Or if testing automation, getting the bugs out. But paper trading like anything else, if you don't work it hard as if it was real, has no value and if done too long, value declines and can actually hurt as some become bored. I agree two different parts of the brain, nothing like the stress of real money and trying to concentrate on not having real loss.
Are you serious? If you want to rack up points get a video game. The only reason to trade is to make money, anything else is a waste of time.
For anyone that has read this book, it will go to show that trading with real money tends to induce dramatic physiological changes that override the brains "reasoning" capacity. This is one reason why most trade amazingly with paper money, but have major issues when real money comes into question. Paper trading has it's place, but do it too long and it becomes detrimental. One of the chapters on here goes into the depths of reinforcing fake confidence. Various neurotransmitters form a new "homeostasis" only to be thrown into total disarray on the introduction of real money and the trading plan from paper money goes out the window. Trading with paper money is VERY different from trading real money. Take a page from those traders that trade consistently well with 200 shares, but just can't replicate those results with 1000 shares. Now imagine going from fake money to real. http://www.amazon.com/Inside-Investors-Brain-Power-Money/dp/0470067373
I agree strongly with everything you said especially the following... Paper trading has it's place, but do it too long and it becomes detrimental.
I would go with the paper trading approach because it helps confirm the overall performance and profitability of the strategy. Only challenge I see is paper trading assumes all trades meeting the criteria are executed while in actual scenario market depth and liquidity decides that. To over come this challenge I suggest do your research on those stock or indexes where there is sufficient market depth and liquidity.
NO. What is most helpful is trading and losing real money in the real market. This is how you learn to win. By not repeating what you did to lose. This can only be done with real money on the line.