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Difference Between Paper Trading And Live Trading!

Aug 17, 2007
If I want to become an investor as defined in the cashflow quadrant by Robert Kiyosaki, then I will need to learn from professional investors. Thus, I had signed up for a few seminars to learn. After attending a few seminars on option trading, stock trading and future trading, I realized that professional traders always have a trading system. And they always follow their trading systems. On top of that, I have learned that as a beginner, I should start off with paper trading.

What is the obvious difference between paper trading and live trading?

In paper trading, no money is involved. Transaction is done based on imaginary money. This means that I can afford to make mistakes in my trading practice using the trading system since no money is involved.

Some brokerage companies do provide an account that allows both paper trading and live trading. The advantage of such account is that it allows a realistic simulation of the live stock market. The share prices of all stocks are real but the transactions are false.

For example, I can setup my account with an imaginary amount of $10,000. Then, I will practice on how to filter and select the appropriate stock to invest based on the trading system. Next, I will decide at what price to buy the stock. Let say I intend to invest in a stock that is currently trading at $13 in the stock market. I will need to key in the buy order and wait for the share price to hit $12. If the share price hit $12, then my account will record that I have 'bought' the share.

Next I have to decide when to sell my shares based on the trading system. Let say I decide to sell at $15. I will key in my sell order and wait for the stock to really reach the price $15 in the live stock market before my sell order is considered to be successful.

After a period of practice, I will be able to learn from my mistakes and improve on my trading skills. Learning from mistakes is the key to success based on my understanding of the Rich Dad's series by Robert Kiyosaki. After 3 to 6 months of practice, I will be able to make consistent profits. Then it is time for me to enter the real market.

This brings me the second main difference between paper trading and live trading, which is emotions. When I trade with real money, there is fear of losing money if the share price goes down. As a result, I will be reluctant to sell my shares if I am losing money. I may keep on holding to the shares even though the trading system tells me to sell. The share price may goes down further. In the end, I will end up losing more money.

When the share price goes up, greed will arise in me. Thus, I will end up not selling even though the trading system tells me to do so. The share price may reverse and goes down. Instead of making money, I will end up losing money. Poor management of emotions is the key to fail at stock investment.

The third main difference between papers trading and live trading is the risk of addiction. I realize that when I am trading real money in the live market, I always want to keep track of the share price. After keying the buy order, I will have the desire to keep checking every other minute whether I have successful bought the shares. If my buy order is successful executed, I will have the desire to keep checking whether the share price have gone up. If the share price goes up, I will feel excited and happy. If the share price goes down, I will feel depressed and sad. This is like an alcoholic addict who drinks to feel high. However, the next day, he will get hang over.

The next difference between papers trading and live trading is that it allow me to gain real experience. Real life experience is the critical component of success as learned from the Rich Dad's series. I can learn all the theories about investment. I may even 'paper trade' investment. But if I do take actions to do the real things, I will never master the investment skills.

My purpose to share about paper trading and live trading is mainly to highlight that proper management of emotions is the key to success. If I can manage my fear and greed in investment, I will be in a better shape to win at investment. This is because I will be able to think better in a calm state.

The author only provides the material and information as a layperson's views about an important subject. The materials and information are from sources believed to be reliable and from his own personal experience, but he neither implies nor intends any guarantee of accuracy.

All the materials, information and procedure in this book are only the author's personal opinion. You must consult your own professional advisor and other reputable sources on any matter that concerns you or others.

The author, publishers and distributors are not competent and do not profess to give legal, accounting, medical or any other type of professional advice. The reader must always seek those services from competent professionals who can review your own particular circumstances.

The author, publisher and distributors particularly disclaim any liability, loss, or risk taken by individuals who directly or indirectly act on the information contained herein. All readers must accept full responsibility for their use of this material.
About the Author
Max Ng helps people who desire success to learn from his mistakes and realizations by sharing his personal struggle for success at http://www.richdadsecrets4me.com . He is the author of "Your Greatest Gift! Why Waste It?" at http://www.yourgreatestgift.com
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