How do you know when to jump in?

Discussion in 'Trading' started by paceadvantage, Jul 25, 2001.

  1. I opened my first trading account last October, and promptly blew close to 2/3rds of my bankroll over the ensuing 6 or 7 months. Along the way, I read all the right books that have been mentioned here, and even took a free trial in a chat room or two. However, I was still doing everything wrong (except for the fact that I had NO problems obeying my stops -- the problem was there were too MANY of them being hit!!! LOL).

    In any event, I stopped trading live, and went back to the woodshed trying to develop my own method. I paper traded a bunch of different ideas, but never had much in the way of "eureka" type success.

    However, I have had some very exciting results lately, and wanted to know how long you guys out there paper tested your methods before going "live".

    I have only been paper testing this method for 7 trading days, but it is the most successful thing I have ever seen to date on paper.....

    Overall, after 7 trading days, I have seen profit in 32 out of 48 trades I put on. I've been tracking 5 different stocks (which I came up with through a scan I use on TC2000). I realize a few of these stocks are in the same sector, and therefore are probably making my figures look better than they should, but like I said, I've done this same thing with other systems I've thought up, but never came close to this kind of success....

    I put on mythical $10,000 trades on the following stocks, using a 1.5% stop. I don't trail the stop unless a certain situation occurs...instead, I wait for a signal to get out, thereby letting my profits run....

    Here is the low down:

    VTSS 8 wins, 2 losses, $1100 profit
    AMCC 9 wins, 6 losses, $801 profit
    ITWO 7 wins, 6 losses, $875 profit
    BRCD 4 wins, 0 losses, $727 profit
    RFMD 4 wins, 2 losses, $31 profit

    TOTAL 32 wins, 16 losses, $3534 profit, 67% hit rate
    These trades averaged a hold time of just over 1 hour.

    These profits include the $20 round trip cost of a trade...

    Like I said, I am a newbie, and I fully expect to have my enthusiasm for what occured over the last 7 trading days dampened by the excellent traders on this board telling me not to get excited. But, I just haven't seen this kind of success in any method I've tested over the past 2 months or so.....

    Any comments? How many paper trades should one do before going live?

    Thanks in advance,

  2. Wet



    I "paper traded" my specific system for a YEAR before I committed a cent to live trading. I analyzed God knows how many charts. I got to watch it in all of the major conditions -- bull, bear, sideways. I learned when it works, and when it doesn't, and why. I calculated it's expectancy in all conditions.

    My recommendation is that you should paper trade until you understand the concept behind your system thoroughly. When does it work? Why? When doesn't it work? Why?

    As well, some of that year was involved in assuring that I had a thorough understanding of money management (not just stops, but sizing).

    The market isn't going anywhere. Make sure you have learned everything you can learn about your system without needing to go live (only then can you learn about slippage, emotions, and other stuff that paper trading doesn't help with etc).

    Most of all, while it is true that there are many important things that can't be learned while paper trading, do NOT listen to those that tell you you are wasting your time paper trading, since "95% of what you need to learn you can only learn live". That's bull, and the quick way to the poorhouse.

  3. "The market isn't going anywhere. Make sure you have learned everything you can learn about your system without needing to go live (only then can you learn about slippage, emotions, and other stuff that paper trading doesn't help with etc)."

    Thanks for the comments. The six or so months I spent getting my butt kicked tought me many things about slippage, emotions, etc...I've also read many great books, including both of Tharp's and Trading In The Zone by Douglas.

    I know from my hobby of developing horseracing handicapping programs and databases that you can test thousands and thousands of races, think you have a positive expectancy method, and still get blown out in the end. I guess I could phrase my initial inquiry a bit more specifically. Should a paper trader strive to show positive expectancy over a minimum number of trades, OR a minimum amount of TIME??

    I fully realize of course that one could paper trade a system that seems like a dream come true for a long time, and still lose when it comes down to putting real money on the line.


  4. Magna

    Magna Administrator


    A 67% papertrading hit rate is pretty darn good. Of course I don't know if they were longs or shorts, whether you would have actually been able to open positions in the many of the trades (due to the market running away from you, inability to get in on a short, etc.) No paper-trading is going to take the place or prepare you for the amount of slippage you'll get in your various fills and your various exits.

    And the slippage I'm referring to isn't about missing a price by a few pennies. No, I mean your setup triggers a buy at 24.50, you put in an order, don't get filled, the stock is now at 24.68, do you chase? And there's no feeling quite like being long in a stock that is panic selling, the bids have totally disappeared, and you can't get out. Or caught in a short squeeze where the buyers are driving up the price so fast there are no sellers to allow you to cover. Those are the slippages that kill you, not getting in or out of a stock a few pennies from where you wanted.

    The answer to when to jump back in is something only you can define, either by a certain consistent hit rate percentage, or the same rate over a certain length of time. When those conditions are met you'll need to jump back in, small size, and see what happens. Maybe your live trading with real fills and real money will come in close to your papertrading percentages. If so, you've got yourself a winning system. If not, try to determine where the breakdown is and either back away from the market and papertrade until you work out the bugs, or hang in there and carefully correct the problems without costing yourself too much money.

    And Wet is dead on when he says that the market isn't going anywhere. If and when you come up with a good practical system the market will be ready, willing, and able to provide you with plenty of opportunities. Best of luck.
  5. Magna,

    Thanks for the reply...the trade stats I posted were both longs and shorts...checking back on my stats, oddly enough, there were 24 shorts and 24 longs amongst the 48 trades...

    Thanks for the reply...your points are well taken..time for me to get some shuteye!! ;)

    I look forward to any further comments anyone else out there has....

  6. Since you have a large number of trades there, paper trading for 12 months probably won't prove a lot (unless of course the system starts losing!). So maybe you could paper trade for another month or so just to make sure it is robust, and then try it with real dollars.

    Perhaps make your position so small that it hardly matters to you in $ terms whether you win or lose (to take away some of the psychological effect). If you make $ profits the first month, increase your position size a little the next month. Then hopefully after 3 or 4 months you have gradually built both your confidence and position size and then you can start building your account size!

    Good luck
  7. I agree with zentrader...

    You should trade small and simply trade to be flat after commissions i.e. go live but trade so small that it wont kill your account. As you become aware of execution issues and emotion issues (that you won't be aware of when papertrading) then increase size gradually.

  8. Good thing I didn't go live today!! LOL I went 3 for 14 today....definitely going to wait and see where this one leads for a while...

  9. Wet


    See what I mean?