If you’d like to teach a kid to ride a bike, training wheels are a bad idea. You’re much better off with a small bike with no pedals.
All training wheels do is confuse, distract or stall… Find something worth doing, find others to join in. Merely begin. – Seth Godin
Godin wasn’t talking about trading and investing but he might as should have. For a long time many pundits have told beginning traders to ‘paper trade.’ That is, conduct simulated trades so as to not only test a strategy but also get a feel for how it works in real-time. In this light, paper trading only “confuses, distracts and stalls.” As I wrote a while ago:
The bottom line is that traders trade. No matter how small the notional amounts involved there is no substitute for putting real money on the line.
I have always been skeptical of that advice, but today that advice is obsolete. The problem is that paper trading avoids the most difficult aspect of trading, the emotional side. Howard Lindzon writes:
You can’t learn if real money and emotions are not on the line. It has never been easier to journal your ‘paper’ trades, but I say dive in small, journal your real investments, no matter how small they are and learn faster.
Traders today have access to commission-free ETF trades through all the major brokerages. If zero-commission ETFs are not enough, you can also trade US stocks through the zero-commission broker. In short, having a small account is no longer a barrier to testing a trading system.
That isn’t to say you should jump right into trading without a plan. You should track your results, recognize that losses will happen and make sure any damage done in your trading account does not affect the rest of your financial life.
Having some experience investing and trading is useful even for investors whose philosophy is more focused on a diversified, index-centric portfolio. Knowing how an individual stock (or ETF) trades can provide useful insight into the operation of the overall markets. Luckily now individuals can do this from the beginning of their investing lives before the stakes get higher.