9:23 PM
killnine
For beginners, before starting real trading, it is recommended that you should prepare yourself first by spending some time to do virtual / paper trading. For those who may be unfamiliar with the term, paper / virtual trading is a trading simulation, where you can �buy� or �sell� a security with real price, but not using real money. You will be given a certain amount of �virtual money� as your �capital�, and you can place a trade through your online broker as if you were really trading.
Perhaps you have read many trading books, attended trading courses, and learnt various trading strategies. Through paper trading, you can implement what you have learnt, practice how to make a trade, and/or trading strategies, without putting your hard earned money at risk.
I know quite a number of articles have discussed the advantages & disadvantages of paper trading. The most well-known advantages of paper trading are: (1) it serves as a great learning tool to give you hands-on training; and (2) no financial risk is involved in paper trading, which means you can�t lose money.
However, many people also suggest that the 2nd advantage can actually be a disadvantage too. Why? Because humans learn from mistakes. We particularly learn more from mistakes that hurt either physically, mentally, or emotionally. When the mistakes don't hurt, it doesn't have the same effect.
Paper trading does not involve emotions, which is in fact one of crucial aspects in trading success. One can be very profitable in paper trading, but may lose money in real trading. Dr. Alexander Elder in his book Come Into My Trading Room: A Complete Guide to Trading
Another possible reason is that ones can do things in paper trading that they would not do with real money. For example, never use stop loss and always wait for the stock price to make a comeback into profitable state.
Why can you do that in paper trading?
Because you don�t need to deal with your emotions, fear and greed, when you are in the process of decision making. In real trades, without a stop lost, how long can you afford to see your trades keep moving against you and accumulating the losses? Depends how strong your stomach is.
Therefore, Dr. Alexander Elder suggested the following:
Still, there is no substitute for trading with real money, because it engages emotions more than any paper trade. It is better to learn by putting on very small real trades than paper trades.
I agree with Dr. Alexander Elder on this. However, I do think that paper trade is also still important, particularly for beginners. Recently, Dr. Brett Steenbarger wrote a post on how one should go about learning to trade. One of the ways to start the trading learning process is through paper trading:
3) Start With Simulation - Yes, yes, I'm very aware that simulated trading (paper trading) is not the same as the real thing. But there's a reason basketball and football players engage in scrimmage games, and there's a reason chess champions practice their game outside of tournaments. Simulation enables you to make your mistakes and learn from them *before* you risk losing in the real performance. It's also helpful to first practice skills without the pressure of making money. If you can't make money in simulated trading, you certainly are not going to succeed going live. Simulation is the bridge between learning and doing; it's an important skills-builder.
So, should you paper trade or not?
In my opinion, paper trading is not only useful, but also necessary, particularly for beginners.
When I first started learning to trade or when I�d like to try new trading system / strategies, I always begin with paper trading. After gaining consistency for quite some times in paper trades, I then try it with small real trades to involve emotions into the system testing.
By doing this, I will not waste my capital to test whether a new system / strategy can work for me. But I do agree that what works in paper trading may not perform well once the emotions are engaged in real trades. So, it�s also important to test it with small, real money as the final step of the testing.
Related Posts:
* Options Trading Basic � Part 2
* Option Greeks
* List of Some Online Stock Option Brokers
* My Online Stock Option Brokers - Sharing My Experience
* 5 Tips For A More Effective Virtual / Paper Trading
