To some, taking control of your financial future is a brave decision. After all, most will just hand off their money in a mutual fund and hope for the best. However, taking a more active approach is the responsible thing. After all, your broker isn’t going to care more about your financial future than you are.
That said, trading is not easy, and can lose a lot of money fast, especially when just starting out. This is why paper trading may be a viable option for someone who is new to trading in general.
What Is Paper Trading?
Trading requires sacrifice and patience. But here is the thing that scares people the most: uncertainty. There is no guarantee, that after all that time spent, you might not make money, and you could even lose.
With paper trading, you are working in a simulated market environment, where you are not placing actual orders through a brokerage. This allows you to develop a process that can be accelerated with the right teaching and mentoring, but without the financial risks.
Benefits of Paper Trading
You know, it’s not a bad idea to trade a demo account, and get familiar with the trading platform and test out strategies before you put real money to work.
For example, you can learn about different types of orders: market, limit, stop. In addition, work on your chart layout; set up indicators and alerts; and create your own stock watch list.
After you are comfortable with the layout, start practicing on trade ideas and trade execution. It’s good to record this information, and then try to figure out what’s working and what isn’t. If the strategy is not working, move on to something different.
Now is the time to experiment and identify what trading style fits your personality.
At Raging Bull, there is a roster of successful traders. However, they all have their unique take to the markets. For example, Jeff Bishop, loves trading options; Kyle Dennis is a biotech trader; Petra Hess thrives trading Canadian stocks; Jeff Williams scalps penny stocks; and I have a diversified approach to short term trading.
The key to making paper trading successful is to try to make it real as possible. If you can do that, it’s a great way to learn and prepare you for the markets.
Downsides to Paper Trading
Paper trading is cool… but when the bright lights turn and the director calls out “showtime,” will you be ready to perform?
When there is money on the line it makes you feel different. As Warren Buffett says, you’ve got “skin in the game.” Are you going to panic the first time a trade goes against and freeze up?
You see, paper trading is a stress-free environment, making it hard to get emotional when you are playing with funny money. And believe it or not, like many high level activities, trading is largely mental.
If you don’t believe me, join a trading room for a week or two. What you’ll see is several people take the same trade and using the same logic. However, one trader could end up with a big winner, another could have closed out flat, and a third actually losing on the trade.
When you real lose money, it stings, enough where you are motivated to find out what went wrong and what steps to take to improve.
With a paper trading account, it’s hard to feel the pain and frustration from losing money on a trade. When you trade monopoly money, the level of interest is not at its peak. The same could be said with paper trading.
Think about it, how many people are going to get up early, review stock charts, create a watch list and follow up on the headlines the market is talking about?
Now, if you can take it that seriously, then paper trading is fantastic. But many people need some skin in the game in order to be motivated.
Of course, there some specific things that suck with trading a demo account. For example, when you are trading a demo, getting filled on a trade is very easy. However, in live trading, sometimes you miss prices and are forced to adjust or change the order.
The demo account may give a false sense of how good your execution is.
In addition, simulating trading doesn’t give a real feel of how the market is reacting. Some demo accounts have delayed quotes, which take away from the overall experience.
Paper trading is an excellent opportunity for new traders to test out strategies, build a layout, get familiar the different order types, and get an overall feel of what it’s like to be a trader. However, some of you won’t take it seriously enough to make it worthwhile. If you are one of those people, consider trading a small account and see how that works instead.
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