I have two questions here:
When one first starts trading, what are some things that one encounters that paper-trading does not prepare one for?
- The most common response I see for this question is, generally speaking, psychology. Novice traders become very nervous about having their money out there in the wild, so to speak, and as a result they frequently withdraw from positions at inappropriate times. Or worse, they avoid a trade altogether simply to avoid the nervousness, even if fundamentals and technicals suggest it is a good trade to make. I personally am not too worried about this, as I am an algorithmic trader, but that leads me to a related second question.
In the real markets, are traders (on average) able to profit using strategies similar to the ones they developed paper-trading?
- I have never seen this question addressed directly, ideally I would like to see a study done on it.
- I frequently hear that strategies will perform very poorly in the real world if they were designed without taking into account slippage and commissions (I have never encountered a demo platform or backtesting engine that doesn't have these features, so I'm not really sure why anyone even bothers to warn about that). My biggest concern is, as mentioned above, the market psychology is drastically different on a demo platform, so is it even an accurate simulation?