Do Paper Trading Strategies Work | Podcast Episode #157

0:07
Hey, I’m Ryan Mallory and this is my Swing Trading the Stock Market podcast. I’m here to teach you how to trade in a complex ever-changing, world of Finance, learn what it means to trade, profitably and consistently managing risk, avoiding the pitfalls of trading. And most importantly, to let those winners run wild, you can succeed at the stock market and I’m ready to show you how?

0:30
Hey, everybody, this is Ryan Mallory with Swing Trading the Stock Market and got a good episode. Hear from a guy from Scotland 16 year old from Scotland. So this should be pretty interesting and I got to give this guy a Scottish name. What better one to give than Wallace as in William Wallace.

0:48
I thought about Longshanks, but I do know that was that was like the king of England at the time. So I decided I’m maybe not give him that one. Thought about Stephen the Mad Irishman, but just kind of playing so I gave him the more masculine William Wallace name for this episode. So Wallace writes me asking?

1:05
And I am a 16 year old from Scotland and I have Ambitions be a real stock Trader, as I am still using demo accounts. My question is, will I be able to take my relatively simple trading strategies into the real markets? For example, I use the 50-day exponential moving average bounce.

1:21
I used the Stuck In The Box and the macd reversal strategies. These have been working relatively. Well for me as I am just short of 6% up this year, using these strategies, I love the podcast. I’ve been listening for about three months now. Five stars. It’s all the best Wallace pretty succinct, email very much straight to the point.

1:40
A good job to him for keeping it. So brief. All right, what am I drinking? Man? Guys, I’m not even looking forward to this one while back. I got a whole bunch of these little sample Whiskey’s. I wanted to try a whole bunch of different ones. I wasn’t quite sure if I’d ever want to buy a bottle of and I’ve highlighted some of them in the past but this one’s just kind of been sitting in the cabinet.

1:57
So I said, you know what, this is the day where I’m finally going to take the plunge. You guys hear me talk about it. You’re going to die. This thing is called, Ravens lace. It’s like this black and hot red colored bottle. I don’t even know what it is on the cover quite. Honestly, it’s only 60 proof.

2:13
That’s 30 percent alcohol. So it’s not going to be a strong drink at all and it’s got this like pinkish tint to it that quite honestly petrifies me. But I try to give you guys a wide range of different options here and that’s what I’m going to do here. So I’m going to try it. I have very very low hopes for this one.

2:32
Oh my gosh, that might be the worst drink move out of the way. Screwball peanut butter whiskey because this thing has got you beat. This is absolutely atrocious. I regret ever even putting it on this podcast. Oh my gosh. That is awful. I give it a score of point zero, zero one five.

2:50
That’s the score. I think that may be the lowest score I’ve ever given to any kind of a whiskey. This is not a bourbon. It’s just the whiskey. It’s disgusting. Absolutely disgusting. I won’t even dump it down. My Because the sink doesn’t deserve it. It’s going straight to the toilet. This may be the first whiskey that I have never finished.

3:08
All right, that’s all I want to say about that. One point zero zero one five. That’s what it gets. Should be criminal, make something that disgusting. Okay. Does paper trading, strategies work, that is essentially what William Wallace is asking here. He says, why be able to take my simple trading strategies into the real Marcus.

3:23
So the first example that he gives and I’ll say this too. Going from paper trading to real time trading is a completely Different experience, what often works and paper trading does not work in real time trading. And why is that is because the emotions get involved.

3:40
It’s not necessarily the strategy, it’s the emotions. We will look at his strategies here. So the first one is the 50-day EMA bounce. Now I’ve seen a lot of people play this. He uses an exponential moving average. I’m not a huge fan of exponential moving averages. Mainly I use Simple moving averages. I’ve can’t even remember the last time and EMA has made it onto my charts.

3:58
Exponential moving averages for those who don’t know, but more weight on the most recent days to form an average, whereas simple moving average weights, all of the day’s, the same. So on a simple moving average, if it’s a 5-day moving average days, one through five are all going to have an equal weighting. Whereas if it’s an exponential moving average of five day exponential moving average it’s going to wait the most recent day far heavier than the closing price from five days ago.

4:22
So that’s the main difference. I don’t use the ma because moving averages in general, are to help you understand the emotions of the crowd. What are they playing off of a and you’re looking to see OK what is the crowd playoff? It does this particular stock. Let’s say for instance it’s PayPal that we’re looking at p y PL and you’re looking at the 20-day moving average and you’re seeing that it’s constantly bouncing off of this. 20-day moving average then that becomes relevant going forward.

4:47
Okay. Maybe there’s a bounce play off of the 20-day moving average. If there is no price action around that 20-day moving average then it becomes irrelevant who cares what the 20-day moving average? Says you only? About it. If it’s got a history of reacting to the 20-day moving average. So he’s talking about a 50-day moving average and exponential moving average that is and whether or not he should be playing.

5:07
I am not a huge fan of that because oftentimes people who are using this trading strategy, they will get very desperate to make some of these trades that they will just trade off of the 50-day EMA. Regardless, that there is a history of the stock bouncing off of that level or not. If there’s a history, that’s one thing. If there’s not a history, why would you do that?

5:23
Because it shows no respect for it. So who cares? I see. In a lot of stocks particularly this year, where it will go up and down below the 200-day moving average or the 50-day moving average for that matter. And when you see that in individual stocks, there’s no reason to put any kind of weight or importance on that moving average.

5:40
It needs to show a history of bouncing off of that moving average, and it doesn’t have to be like multi-year, history. It can just be like the last five times its tested, the 50-day moving average. It’s bounced off of it. So it’s not something that’s always going to work. And even if it does have a history, and you were able to identify that, You play.

5:57
It doesn’t necessarily mean it’s going to work for you, then either. It’s a very Niche technique that will give you some wins and some losses, but you got to make sure too that you’re not just successful trading this because you’re not paying attention to stop losses. Like, a lot of people say this technique works because they’ve able to close the trade out but it may not be working because of the 50-day moving average, just maybe working because you’re not showing much discipline in your trading and that we’re in a market right now where the dips keep getting bought up and so eventually you’re proven right, but that doesn’t necessarily make the technique correct.

6:28
And for me too, using a top-down trading strategy, where I put the most weighting on what is the market doing followed by the sectors and then the industries and then the individual stocks that are moving the industries and sectors. I have to look at a lot of other things first before I even get to a whether or not the 50-day moving average would be significant in that trade.

6:45
So there’s a lot going on there and he talks about the macd reversal strategies. But before I get into that, I want to tell you real quick about swing trading the stock market, it is the website that goes right along with this podcast, you’re going throughout the week, all of my market research. That’s going to include my watch list updates that I provide for both bullish and bearish stocks, you’re always going to know what stocks I’m bullish and bearish on then each day I’m going to be giving you the setups from those watchlists that I find the most intriguing and the ones that you need to be looking for.

7:13
And the day ahead on top of that, I’m going to send out my favorite charts on the day. The ones that I’m finding most unique or providing good trade setups and you’re going to get updates each week on all the Fang stocks, including Microsoft and Tesla as well as get updates for the S&P 500, and NASDAQ 100, and the Russell 2000 multiple times each week, in fact, so check that out. swingtradingthestockmarket.com

7:33
Now about these macd strategies. Now, this is a very common indicator and it’s basically a subset of price and volume. So what I always tell people is is get good with price and volume. Don’t rely on the indicator so much. A lot of people will look for reversals in the macd.

7:50
To justify a trade setup, but I always tell people this, that that should be really a secondary thing that you’re looking at is like, okay, hey, the chart’s setting up, it’s getting ready to break out, the volume’s good, the price action’s really good. Look, I like all that stuff, and you got the macd reversing too. So it’s almost like a confirmation of what you’re getting with price and volume, but it shouldn’t be a, let’s ignore price and volume and look just at macd here because those things can diverge sometimes and not give you a true reading of what the actual stock is doing.

8:17
So, it really should be a secondary indicator for you going forward. He also uses another strategy called Stuck In The Box. Now I’ve never heard of it actually phrased in that way, but it comes from a Nicholas Darvas book. Gosh, I don’t know, I think it was made in like the 40s. If I can remember, it’s called How I Made Two Million Dollars in the Stock Market, pretty good reading.

8:35
One of the main things that he did in this book was talk about the Box breakouts. I like them, I trade them too. I mean they’re basically like consolidation boxes. What you can often do with it is draw literally a box around the price action and the price action bounces off the top and the bottom of the box. And then you get long if it breaks out of the box and you get short if it breaks down below the box.

8:54
Now, that’s a pretty simplified version of it. In essence, it’s a breakout pattern. Now you have to be careful with them because sometimes the boxes can be quite large and a lot of people will put their stop-loss below the bottom of the box. And if you do that, you might be risking like 20 or 30 percent on a trade. So you don’t necessarily want to do that. But people will play that breakout and see how high it can go for them.

9:12
Now it’s not a bad trade strategy, it’s a version of a breakout play. Yeah, that can definitely work in the real time. He also talks about how he is up, six percent on the year and that’s good, you’re doing a good job there but you got to remember it’s paper trading. You start putting the emotions into your trading. When you start going real time, it adds a whole other element there so that six percent could be a whole lot less.

9:32
Especially if you become undisciplined in your trading, it’ll start turning into a negative amount because those emotions can lead you to make some really, really bad trading decisions. So know that, when you get into the stock market for the first time and even if you’ve been a very successful paper trader, you’re going to deal with a whole new score of emotions because let’s face it when you’re paper trading, there’s no accountability, there’s no worry.

9:54
If you mess up, blow up an account, you can always start over but you can’t do that in real time trading. Once you lose the money, you lost the money. You got to make that up. Somehow you got to do it with less money than what you had before. That’s why I like to keep my losses small because I know when I have a losing trade I don’t want to have to make up for that loss with a dramatically smaller amount of money in my portfolio.

10:13
Think about it this way if you take a 50% loss on your portfolio and you put everything you have onto the next trade and you make 50% back. Guess what? You’re still down 25% on the year. You literally have to double your account in order to make up for a 50% loss. So, recognize the emotions that come with jumping into the stock market for the first time, after you’ve successfully paper traded.

10:34
Because once you start getting into the real time trading environment, the emotions of fear and the emotions of greed, they’re going to kick it up to a notch that you’ve never experienced before. And the smaller amounts of money that you trade with or the less significant that the money is to you, the better you’re going to do as a trader, so it doesn’t hurt to start off small, especially in a commission-less environment that we’re in. My philosophy on trading has always been to trade the amount that gives you the least amount of emotion. Now, that doesn’t mean that you trade with 10 cents or something like that or a dollar or whatever, but you want the amount to be significant enough to where when you’re successful at trading, it does improve your life but you also don’t want it to be so much so that you’re losing sleep at night, where you’re breaking mouses and keyboards.

11:13
I had to learn that the hard way in my life and I don’t want you guys to have to do that as well. So Wallace, William Wallace recognize. When you’re going from paper trading to real time trading, the emotions are going to get crazy. So know that. Plan your trading strategy around that and I hope you do great. That’s going to do it for this podcast.

11:32
If you could do me the favor of continuing to send me in your emails, ryan@shareplanner.com, I read them all. And I love putting them on the air as well as leaving me a five star review that also means the world to me that’s like the currency for podcasters, getting those five star reviews.

11:47
So if it’s on Apple or it’s on Amazon or Spotify, if you can leave me a review, that’s great, if you can subscribe. That’s also great too. Thank you guys. And God bless. Everybody, except the people who make Ravens Lace.

12:08
Thanks for listening to my podcast, Swing Trading the Stock Market. I like to encourage you to join me in the SharePlanner Trading Block where I navigate the stock market each day with traders from around the world. With your membership, you will get a 7-day trial and access to my trading room including alerts via text, email, and WhatsApp. So go ahead, sign up by going to shareplanner.com/tradingblock. That’s www.shareplanner.com/trading-block and follow me on SharePlanner’s Twitter, Instagram, and Facebook, where I provide unique market and trading information every day. If you have any questions, please feel free to email me at ryan@shareplanner.com. All the best to you and I look forward to chatting with you soon.