The most common question I receive is…
Why do my system tests always work paper trading but as soon as I bet them, lose?
I’m sure that you’ve experienced this in the past. It’s happened to all of us, and that’s important to remember.
But, the big question is… why is it happening?
Assuming that you’ve been paper trading a system on real live bets, rather than running it on past results which is a separate topic, then I’m going to tell you why in just two words.
I realise that’s not very helpful, but it’s the truth.
Don’t worry, I’ll explain it better!
Let’s take Steve as an example.
Steve had developed a system that looked to be making excellent profits. He’d spent a long time working on it, and now the time to test it was at hand. But, to be safe, he decided that he was going to start by paper trading the selections. After all, he didn’t want to go and lose his bankroll on something that could still be backfitted, even though he was pretty confident it wasn’t.
At this point Steve was excited, he’d spent a lot of time developing something that works and he couldn’t wait to prove to himself that he was right.
Once he began paper trading he hit a good run. After just three days he was starting to find it harder and harder to continue paper trading. He’d spent a long time building the system and deep down he knew that it worked. He’d even proved to himself that it was working over the last few days where it made consistent profit. Now he was just losing money by not betting on the selections.
But… he left it for another day just to be sure.
And the next day, he made more profit. That was it. He wasn’t going to wait any longer missing out on these profits. So the very next day Steve began to place real bets and…
…he started losing!
He lost for the next week, and by now he was getting worried. The system had been working so well until he started placing real bets on it, then it immediately began to lose. What was happening! All the weeks of work and the successful paper trading, only to be losing when he started placing bets.
There must be a reason.
So, Steve went back to his original system and looked at the results of the last week to see how he could adjust it to make a profit. And he found it.
The very next day he implemented his changes and… he lost again!
But if he’d stuck to the original rules he would have won. So, he switched back the following day and… lost.
No matter what he did he kept losing.
The reason he kept losing was nothing to do with the system that he built. The only problem that Steve had was… himself.
He made just two critical mistakes. These two mistakes resulted in him not only losing his bankroll, but also throwing away a system that worked!
His first mistake was when he stopped paper trading.
It’s very difficult to stop yourself betting from your live account when you’re paper trading through a winning streak. But, if you’re paper trading a system that has a winning streak, the last thing you want to do is to start betting it live because only one thing comes after a winning streak…
A losing streak!
If you’re already seeing the winning streak then you’ve missed it, by the time you start placing your real bets you’re going to be placing them just in time to catch your losing streak. And because this is a new system, you’ve never experienced a losing streak for it before. Which means that you don’t know how long it’s likely to last in a downswing.
Psychologically you’re not yet ready to cope with that downswing, especially if you’ve started betting at the beginning of it.
When you paper trade you should give yourself a set time of one month, two months or however long you’re comfortable paper trading for and stick to it. It doesn’t matter if there are winning streaks or losing streaks. If you’ve built the system properly then it will be profitable. What you’re actually doing, is training yourself to cope with the upswings and downswings of a new system.
The second mistake that Steve made was changing his strategy. Because he didn’t realise that he had started betting on a downswing, he thought he could solve it by changing his selection approach. An approach he had spent weeks developing and testing was changed in one night based on the results of just a week.
What he was doing was backfitting a new system to the results from the last week, rather than relying on an approach that had been carefully developed.
Because he hadn’t been through the complete paper trading process that would have trained him in coping with the upswings and downswings, he didn’t realise that a losing run of a few days was completely normal. In fact, he could have expected the losing streak to go on for much longer.
We can take two very important lessons from Steve’s experience:
- We must choose a paper trading timeframe and stick to it. We are training ourselves to understand how the upswings and downswings work and how to cope with them.
- You must never change your selection process based on just a few days data. Changing a process you’ve developed carefully should only be done with a lot of results and a large amount of consideration. It is a very last resort.