Playing with Paper Money

The markets are closed for the weekend. I could write about something else like arts and crafts, needlepoint, quilting, shoes, cooking, or the inner workings of the several diferent types of continuously variable transmission. That has all been done before though.

What nobody ever talks about is the specific differences between Paper Money programs, designed to practice Real trading online in Real time with "Monopoly" style Money versus how the same software trades in the Real world. Of course it is like playing Poker with unofficial Plastic Chips. There is no risk except to your pride. If you need, I can call you a "Wah-mbulance" if you think that helps.

For one, you are not part of the Real World answer. If Liquidity and Volume are too low, your Real trades will actually affect the Real market numbers. In Paper Money, the other side does not hunt around to grab your Stop Loss or execute at an undesirable price (to you... not them of course.) Dead President/Live Monarch Money brings lots more people to the Table, and You are an entree... if not the  main course! If you are lucky enough to find some way to really beat the system, they will change the system, even if it takes themselves down. Think the recent manipulations and covering for the bond market with the Fed. It has hurt the time value of Real Money.

Now, I know that I have that annoying habit of capitalizing  words in the middle of sentences for emphasis. I also have lousy grammar and punctuation habits, but humor me  for the sake of Paper or bits as the case may be. They also do not have little hearts to dot the eyes and jays with. Pity. But I digress again...

Some Paper money programs just Buy and Sell at an Average Price between the Bid and Offer or Ask. If Real Money only had that "feature," then we would be too busy jet setting to hobnob in Davos, Yachting to Margaritaville, or feeding carrots to the Polo Ponies to Blog about Faux Financial Stuff. Eliminating half the Spread provides a handsome Paper Salary indeed. I made my first Paper Million that way. It certainly highlights. the difference between the plotted MARK and the BID or ASK.

Yet these programs are invaluable to keep track of the performance of relatively long term held equities, options, futures, and FOREX trades. The Functionality of the software is basically the same even if the executions differ, and sometimes more than slightly. Never mind that the "Munny" is worthless, although that very fact does create a false bravado in that you can always wipe the slate clean and start over again after recklessly playing with "What if?" scenarios.

There is a Volatility Approximation in these programs. Real volatility effect appears even larger, coupled with real liquidity and volume. The difference between BID and ASK may not be as advertised in quotes once you add yourself into the mix unless there is enough open interest in that strike. Watch the spread carefully when putting on short straddles or similar in a high volatility environment. UVXY Option Spreads have ballooned by a factor of ten times normal or more for more distant month expiry dates after this recent volatility spike, and even then, the executions can be stingy. Definitely haggle with them, but it may cost you a resubmission fee.

Regular financial advisers do not know. They simply say it does not work. Ask them why and they cannot put their finger on it. Knowing why something works in the simulator and why something does not is of course crucial to using this stuff as advertised.

There is an exception for the Profit Loss YTD in some programs. It seems the "reset" will not change that. YMMV. I haven't tried every paper money program out there, and I haven't had a reset for ages, although I am guilty of having adjusted positions after mistakes. It is almost like being a Progressive politician; You can almost do no wrong in the Paper after a little spinning, or by ignoring the bad stuff. Real Money is obviously the opposite.

It seemed like network troubles always cropped up around the approach of Quadruple Witching expiration in Paper. This happened 4 times annually when all the index futures and options expire simultaneously, and generally around the equinoxes and solstices. I haven't had that oddly regular problem in Real that I can recall so far, but there have been various other option exchange outages at different times, some possibly due to an organized cyber attack. It does highlight the fact that we are slaves to the network, have become complacent due to the relative rarity of outages, and we may have to fall back on the phone with all its limitations as well.

"It looked good on Paper!" has been recalled more than once though. Seek out someone who has done enough real trading, even though they will be reluctant to tell you about these things without remuneration.. That alone has to tell you something. A seemingly successful trading strategy developed in Paper will quickly expose weaknesses born of low liquidity, fast moving contrary markets, and faked sunny execution prices. Armed with that tidbit, plus what you will inevitably find out on your own, hopefully you can come away with more than you paid for it.