Is Paper Trading Good For Your Business?
You might ask, how can not risking any money EVER be a bad thing? If you look at it from that view, then you would be correct, there is never anything wrong with not risking any money. That being said, if you truly want to be a successful trader, you need to understand that it’s never going to happen without taking some risk, and likely stepping outside your comfort zone. As soon as you put real money at risk, you will have a completely different feeling than you do when you are paper trading. So, if you are going to paper trade, and you want it to help you build your trading skills, then you need to be vigilant about trading the way you would with real money. That means you must set a price entry, watch the time and sales ticker to confirm that you would have been filled, and then set and honor your stop. There can be NO exceptions made to these rule, and if you slip up even a little bit, you are doing yourself and your trading business a grave disservice.
Paper trading is a fantastic way to start a new strategy. Once you have the rules for your strategy mapped out, as well as the tactics you are going to use to execute the trades, you can then start to paper trade the strategy using the rules above, and keep copious notes and records so that you can have all the evidence to decide if you should start trading your new strategy with your hard earned, real money. A good rule of thumb is either 1 week of paper trading, or 50 trades, whichever comes first. That should provide enough data for you to make a good, educated decision, but if it doesn’t, then you can continue to paper trade a bit longer.
This doesn’t mean that after 1 week of 50 trades that you dive straight into the deep end of the trading pool with your strategy. The biggest mistake that traders make is paper trading for a bit and then going out with their full size right away. How do I know this? Because that’s what I did.
When I first started taking trading seriously, I paper traded for 30 days. I got my win percentage up to over 85%, and I was ready to rock and roll. I went live, risked way to much per trade, and lost about 70% of my portfolio in a few days. I confused real trading with paper trading, which is the biggest reason that most that paper trade for too long lose almost immediately when they go live. I had to fight my way back, but that’s a different story for a different article.
When you average in on paper, who cares? You have unlimited paper money, so it’s not hard to just keep clicking. You tell yourself that you’ll just do it this once and you won’t do it when it’s real money, but you know you will, don’t you?. If you don’t manage your simulated account in the same way as you would a real money one, you are only setting yourself up for account doom. I know I sound like a broken MP3, but manage your paper portfolio EXACTLY the way you would manage a winning real money account.
One way that simulated trading should be used is when you are breaking in a new trading platform. Take as many trades as needed to understand how to enter and order, place stops, and do all the fancy stuff that you want such as placing trades right on the chart, putting one cancels other functions in the order cue and the like. It’s very important that you understand how your trading software works, and there should be NO excuses for screw ups in simple order entry and stop placement. Usually, it will only take a few minutes to an hour in order to get things straight with your platform, but I urge you to read all documentation, take training, and watch videos if provided. Relax, the market will be there when you are ready.
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