Lessons from Jesse Livermore part 8: Imaginary Millions

The Lessons from Jesse Livermore Series explores the trading philosophy and trading rules of renowned trader, Jesse Livermore.  Here Livermore discusses paper trading.

Reminiscences of a Stock Operator  Ch 3 pg 27 p2

“I have heard of people who amuse themselves conducting imaginary operations in the stock market to prove with imaginary dollars how right they are. Sometimes these ghost gamblers make millions. It is very easy to be a plunger that way. It is like the old story of the man who was going to fight a duel the next day. His second asked him, “Are you a good shot?” “Well,” said the duelist, “I can snap the stem of a wineglass at twenty paces,” and he looked modest. “That’s all very well,” said the unimpressed second. “But can you snap the stem of the wineglass while the wineglass is pointing a loaded pistol straight at your heart?”

The Lesson
Ah yes, paper millionaires. We’ve probably all known a few; maybe we have even accomplished this achievement ourselves. As most have learned however, that fool-proof, no-lose system doesn’t do so well when one places real dollars on the line. Once real dollars are involved, all the “system operator errors” like fear, greed, and indecision among many others filter into the results.

Using Paper Trading as a Tool

Paper trading can serve as a valuable tool to our real trading. Here are a few ways paper trading can be beneficial.

  • Back test various strategies. 
  • Validate the prospects of a new / un-tested trading strategy by paper trading at least 25 trades to look at the results of a decent sample size. If the results look promising, continue the refinement of the trading process.
  • To practice the process of trading itself; If you cant show progress trading imaginary dollars, there is little prospect of success trading real dollars

Action Activities

  • Understand that paper trading results are the best results you will ever see.
  • Real world trading results will be worse; that’s just the way it works
  • I am convinced that there are at least 1000 systems that will make you money in the market. The key is to find a system that is in complete alignment with your beliefs/  personality, and one that you can execute.
  • In turn, execution is dependent on the degree to which you are able to conquer and subsequently master the personal demons that undercut our performance on a daily basis.

Happy Hunting and Good Trading

Like the Series so far?  Here are links to additional installments

Part 2:  Stop asking why   HERE              Part 3: Play a Lone Hand  HERE

Part 4:  A Time for all Things  HERE     Part 5: Expensive Enemies  HERE

Part 6: Commissions Matter  HERE     Part 7: Blown up Accounts  HERE

Part 8: Imaginary Millions HERE            Part 9: Give it Time    HERE 

Part 10: Sit Tight    HERE            Part 11: How to Buy and Sell Stocks   HERE

Christopher Buss
Managing Director,  Trader’s Profit Compass
Swing Trading | Trading Education | Trading Psychology

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