One of the top rules in trading is: live to fight another day.
Now, if you’re brand new to the markets and trading in general then it’s your number one rule.
Because it takes time to discover what your strengths will be, how you handle the emotional swings of trading, and everything else that goes into putting your hard-earned money on the line.
That’s why I always advocate beginners (and unprofitable traders) to paper trade first.
Without an edge you’re just gambling.
And a surefire recipe for blowing up your account.
That’s why most traders fail before they can ever get off the ground.
However, I refuse that to be you.
To ensure it, I’ve created a guide that walks you through step-by-step the best practices for paper trading.
What Is Paper Trading?
Paper trading is in essence a way to practice trading before putting real money at risk.
Back in the day, traders would actually use a piece of paper to track their “fake” trades, hence the name paper trading.
They could practice or test a strategy by writing down the symbol, time, price and whether bought or sold… then track the trade and write down the same details for the closing order.
This would in effect give them a way to see if their strategy would be successful.
Nowadays, thanks to technology, you don’t have to painfully track trades on a piece of paper because we have trading simulators that replicate a real trading environment.
With these new “paper trading” accounts, you can trade in a real-time simulated environment using the same trading platform you will with real money.
You still hit the keys and place orders in real time with real market data etc., it’s just fake money.
This offers a much more lifelike experience and is definitely a step up.
Why Should You Use One?
Once you have spent the time to learn a strategy, you still don’t know if you can make money or not in the market.
Paper trading lets you test your trading strategy in a real time environment.
Knowing how to spot your trades is great, but nothing can prepare you to actually buy and sell in real life. The simulated environment of a paper trading account is as close as it gets.
This gives you a no risk way to test your strategy and trading skills. Along with the ins and outs of the trading platform.
Accidentally buying when you meant to sell or putting an order in at $1 instead of $.01 can be devastating.
Therefore, getting familiar with the trading software could save you money.
Real money = Real stress. If you have traded before then you know exactly what i’m talking about. If not, you’ll find out real quick when you make your first trade.
Being able to practice without the same “real money” stress can help you make better decisions and become more robotic with your decisions helping you when you go live.
And this is given you have the opportunity to gain confidence before being put to the test. You don’t have to trade real money until you are ready.
Paper Trading helps you know when that is.
What to Watch Out For
First off, the emotions are not the same.
Don’t think just because you made money in a paper account that it will be as easy when you trade live.
The point is to prepare you as much as possible, but nothing can actually give you the same experience as trading real money.
Slippage/ real fills/ spreads – The other drawback is the fact that you won’t face some of the same pitfalls as real trading.
When you place the order in a simulator, you will get filled as long as the market shows that price.
But in real life, you could be sitting with a buy at $1 and even if the stock prints at $1 you didn’t get filled.
For example, there are a total of 1 million shares on the bid and it only printed 100k shares.
Well the other 900k are still sitting there, so it’s possible to have an order go to the price and not get filled in real life.
But on paper it will auto fill you if it is printed bc you aren’t actually in the market, it’s the benefit of the doubt.
Same goes for slippage. When a stock hits your stop loss order and “slips” .50 on you in real life…
This happens when there is a large amount of sell stop orders in the same place. When the stops trigger, there becomes an imbalance and sends the price whipping down to until all the market orders get filled.
Again, your simulated trade would have gotten the actual stop price regardless of slippage, misleading you to the profitability of that trade.
How To Make It Count
As far as where to open one, pretty much anywhere. If you search google, they are all over with plenty of free options.
I suggest using the broker you will use once you go live. This fits the benefit of learning the trading platform now so you don’t make little order entry mistakes when it counts.
So more importantly, find the broker you want to use and then use their simulated environment.
If you plan to trade then you need to have a strategy you are testing out.
Don’t just go in and buy and sell based on a non repeatable format. That won’t get you anywhere especially with the lack of emotions with fake money.
Plan your trades and trade your plan. Just like in real trade, you must always have a plan.
Before going into a trade, you should know your buy, target, stop, number of shares, whether you will scale out etc etc… anything that you might do needs to be planned…
And then stick to the plan.
This is one of the best ways to learn from mistakes and correct them to become more profitable.
Write down details of each trade. Feelings you had, mistakes you made, what you did well, etc.
By tracking your trades, you can learn whether it’s worth going live or not…
How can you be comfortable going live if you don’t really know the stats on your trading?
The stats will let you know if what you are doing even makes sense to take live.
Don’t risk real money until you have a chance to actually make it.
Here’s what some of my students have to say about their experience with paper trading:
“Just profited over 10% on SNNA. My first “LIVE” trade! Been paper trading for a few weeks now. Thanks for all the guidance everybody! I am truly grateful to be a part of this amazing team!! LET’S GO!!!” — James G.
“I was able to turn $500 in a small account into $1350 in the 4 weeks before Christmas. I was brand new to Jeff’s system, still learning on paper (which I recommend) but some of the trades were just too obvious to paper trade.” — John K.
“My first trade with Jeff Williams! GPOR 17.98% $945.00 paper trading!” — Cheston T.
“Morning! I paper traded FCEL, and OMG!! +$542 bucks!” — Eric R.
Paper trading is the best way to prepare for the real thing.
Start with learning a strategy and then apply that to paper trading.
Follow all of the same rules as if you were trading live… in fact pretend it’s reall as best you can.
Try to actually feel the emotion as if it was real money.
After all, it will be soon.
And once you have shown you can trade a strategy with consistent profits, take it live.
There will be a different feeling as you get into real money.
But with the time you spent paper trading, you will be able to adjust that much quicker.
Paper trading is an almost essential step to becoming a successful trader, so take it seriously and learn as much as possible during your time in simulation.
To get you started on the right path… check out my getting started guide.