Fellow Seeking Alpha contributor Robert Weinstein wrote an excellent post at his trading blog, What Is A Simulated Trading Account And Why Should I Use One?
In it, Weinstein discusses the merits of trading with fake money:
One of the biggest complaints about trading with a sim account is it lacks the "thrill" of a real trading account and removes the emotional element. That is true for most people and there is one very important caveat to the statement that should be heeded. You do NOT want your trading to be "thrilling" or exciting or really even to raise your pulse rate (much). The thrill you feel with real money is part of the fight or flight response and while it may be enjoyable to receive the "gambling high" as a result of the various chemicals your brain is ordering released, it doesn't make trading more profitable or improve decision making. In fact, I believe ... the same changes causing the gambling high will cause you to make poorer decisions and cost you money.
That paragraph resonated with me.
From time to time, I probably discuss more about my personal life than I should. I do it, however, when I think it can do two things - help, in some small way, the greater good and help at least one reader become a better trader and investor.
Early in 2011, I did some day and swing trading with real money. I experienced pretty good success, turning a profit over the several months I allocated primarily to trading.
At the end of 2011, I created and mostly made near-term, speculative options trades in the $10,000 portfolio. I had great success there, more than tripling the portfolio's value in roughly four months. With 2012 here, I have transitioned both my real-life and simulated trading and investing to the much more conservative side.
The aforementioned 2011 experiences helped inform this strategic shift. And much of the reason for the shift relates back to what Weinstein wrote when touting the merits of simulated trading. While both set-ups proved instructive in very similar ways, the simulated experience was probably more valuable. Weinstein covers that angle well on the practical end of the spectrum:
Pilots go into simulators before flying the real thing. There are two real easy reasons for this. First, it costs less to use a simulator (same with trading), and second pilots get to become good at making the correct decisions under pressure without real risk (same with trading). Army tank personnel, Navy submariners, and police all practice in a simulated environment to become good at what they do. If it makes sense for all of these risk takers, it's hard to argue it doesn't make sense for you IF you truly want to be a professional trader and not simply a thrill chaser.
But, it was about more than a dry run for me. Both my tryst with real-life trading and simulated trading and investing informed further practical as well as psychological factors as I reevaluated my portfolio strategies.
Even though I did alright in my real-life scenario and remarkably well in the simulated one, I asked myself if I really wanted to spend my days and put my money into daily high-stress trading and investing. Or, more aptly, not if I "wanted to," because deep down I probably do, but if I was cut out for that sort of thing, mainly from an emotional standpoint.
For me, chemical responses in the brain are real. I used to feel weird about being open about this. But, after watching well-publicized tragedies in the National Hockey League over the summer, I figured the more people share their psychological battles, the better.
For somebody who has dealt with (and, previously, not dealt with) depression and anxiety for years, the chemicals in my brain, particularly the ones that control "fight or flight" simply do not fire correctly without medication. I'm convinced of this.
Throw me into a situation where I am taking on more day-to-day risk than the average person and you'll see this reality amplified. Personally, when I was in a big trade or holding a position on a volatile stock into earnings - both in real-life and sim accounts - I could almost actually feel things altering inside my head.
When the heat was on prior to a Netflix (NASDAQ:NFLX) or Research In Motion (RIMM) earnings call, I was more easily agitated at home. I noticed I wore a thinner skin in response to the harsh comments I receive, on occasion, from readers. Soon, I came to realize that it simply was not worth the emotional distress even if I could make money for real or achieve a simulated triple.
If trading, investing or some other endeavor creates anxiety or some other undesirable emotional impacts, reflect on and then change the way you do things. It's tough to make the concession that I'm just not cut out for this and should approach things differently, but it works wonders. I'm convinced, after years of trial and error, that, for me, the chemicals do not fire properly without the use of psychotropic medication. But, that aside, my "fight or flight" and "gambling high" chemicals get thrown for a loop when I'm in a trade or investment that, while even if likely to be a winner, just does not mesh well with my psychological make up.
Consider the most popular query I've received in the past week: What calls should I buy prior to Apple's (NASDAQ:AAPL) earnings report? I always have to remind readers that is advice nobody should be giving them. They have to decide for themselves on the basis of their own circumstances, including psycho-emotional ones.
I set up three different option plays in the $10,000 portfolio to capitalize from upside in AAPL to help illustrate how contracts with different dates roll. Because AAPL has soared, it has not been the greatest learning experience to date - everything's a winner - but, generally speaking, if I can only choose between January, February and July calls, I'm going with July.
No matter how you slice it, sitting in a trade that will lose virtually all value if something does not go your way is not something most people should do with money they do not want or, worse yet, cannot afford to lose. Apple could blow away every meaningful metric, yet, if iPad sales fall just shy of estimates or Tim Cook, shockingly, announces he's stepping down and moving to Burma, the stock sells off and you get crushed. Heck, the stock might sell off even if everything goes well if the market priced it to the upside in the near-term. At least, if you're in a July call, you've got time on your side for a dust-settling recovery.
If this is how you look in an intense, make-it or break-it trade, you really need to reassess things.
I absorb quite a few shots for being long Pandora (NYSE:P). But, I take such a speculative position on my terms. Just as I have no control over what happens on Apple's earnings call, I have no control over what happens in Pandora's future. Things that we have no control over can cause us anxiety. In all of life's ventures, particularly trading and investing, we should strive to do things that limit such emotional angst.
As such, I, first off, invest a relatively small amount of money in Pandora. Second, knowing that it's a volatile stock, I do not invest in it all at once. I dollar cost average into the position. Sure, I started buying it at about $14.00-$15.00, but I've also bought the stock below $10.00. My cost basis sits at about $12.30.
Is averaging down always a fool's game? No, not when you're not doing it to save your butt. I went into the Pandora strategy with the intent to buy the stock, on a bi-weekly or monthly basis, for at least one year, most likely longer, holding all else constant. I don't want my aforementioned aversion to risk to take me out of the game of wanting to hit a home run completely, so I employ a plan to take a chance on one of my stronger convictions that still allows me sleep at night.
In my basic options strategy eBook, I cover ways to use options without losing sleep and, hopefully, money.
End point - traders and investors at all levels and with all sorts of goals should think long and hard to ensure that their trading or investing styles mesh comfortably with their personalities. Your situation will likely be different than mine, but most people have critical and tough questions they would benefit by asking themselves before they marry themselves to a trading or investing approach.
Additional disclosure: I am long NFLX June $40 put options.