THE BEST WAY TO LEARN HOW TO TRADE!
Paper trade refers to using simulated trading to practice trading strategies without actual money being involved. It can be done hypothetically by simply keeping track of positions but it is much more beneficial to use a stock market simulator, one that has the look and feel of an actual stock market. It is even better if your real trading platform has a simulated version this way you can not only practise your trades but get comfortable with using your trading platform in a relaxed, non-pressured environment and hone your skills.
To derive the most benefit it must be taken seriously with trading decisions made based on the same risk-return objective and constraints as in reality. Beware however paper trading may give the beginner the impression that trading is easy, this is because it does not involve putting hard earned capital on to the line nor does it involve one of the biggest trading considerations of all – your emotions and the psychology of trading! Basic trading rules for example – Buy Low & Sell high – even this can be quite difficult to adhere to in real life!
Some traders advise others ‘it’s only when you lose real money that you will learn’. I completely disagree with this you should practise you strategy and be making CONSISTENT profits within the strategy before putting real cash on the line! No matter how good a trader is new strategies bring new risk and to risk real money has two downsides to your portfolio i.e. the direct loss of money and the loss of the use of that money to earn income within your portfolio.
ADJUST YOUR TRADING STRATEGIES ALONG WITH YOUR EXPERIENCE
As well as using paper trading to learn the pros and cons of new trading strategies there are times when we should return to paper trading with our old strategies – perhaps they are no longer consistently profitable – Is it the market or you? Is it the stock choice or have you changed something unconsciously? Paper trading allows us to figure out what is wrong.
A big advantage to paper trading is the knowledge that losses are on paper only. Paper trading allows us to experiment without the fear of loss, we can refine current and practise new strategies. Paper trading slows down the pace of trading and allows you the time to focus on the structure of the strategies, the ‘what if’ scenarios without the worrying. Every strategy is not for every trader thus paper trading allows us to determine what specific strategies work for us and allows us to discard the ones that do not.
The main disadvantage of paper trading is that it does not take your emotions into consideration. It can help prepare us for possible losses but loosing paper capital is definitely not the same as losing real capital and it sparks a totally different emotional response.
For me the advantages far out weight the disadvantages. I believe traders need to understand the importance of paper trading and the positive impact it can have on their trading strategies and skill. Paper trading will assist you in become a more confident and competent trader.