Ways to Trade Paper

The simplest approach to paper trading identifies an interesting stock through a chart on a website or analysis of a market personality, notes the ticker, and chooses a time to spend a hypothetical order to buy (or sell if you want to sell short). The newbie notes the open price if he enters at the start of the session, or looks at the chart and ticker during the trading day, choosing a point that looks like a good entry.

The choice of entry price and duration varies widely, depending on the basic tutorials used to learn the game of trading. The same is true in the management phase when it comes to deciding where to place the stop and how long to hold the position. Regardless of the approach, an exit price is ultimately devalued and the newbie repeats the process until enough data is collected to analyze the progress.

While pen and paper work great for the paper business, the spreadsheet provides a more powerful analysis tool for detail-conscious people as they can add additional columns to capture

stop placement
time of day
hold period
day of the week
internal market including index direction and market volatility

Trading simulators offer l most powerful approach to paper trading as they allow beginners to set up workstations that mimic real market conditions in real-time. Many brokers are now offering this service for free to clients, allowing them to use the same trading software as real money players. This connection is invaluable as it allows for a seamless transition from a simulated business environment to a real business environment once the student is ready.

A final approach can be used anytime, even on weekends when the financial markets are closed. Have a friend or spouse randomly choose a data sheet, print it out, and hand it to you with the right side covered with a second piece of paper. Make sure the chart contains all of the technical indicators you want to use in real-world trading. Take the second sheet and move it one at a time to the right price bar as you choose where to buy and where to sell.

While pen and paper work great for the paper business, the spreadsheet provides a more powerful analysis tool for detail-conscious people as they can add additional columns to capture

Main Benefits

We outline the main benefits of paper trading, looking at how it shortens the learning curve so that beginners have an edge when it is time to play for real money.

 It costs nothing and you cannot lose money with bad decisions or bad times. It also allows you to observe any loopholes in your analytical process so that you can begin the arduous task of creating a well-defined business advantage.

Trading evokes the twin emotions of greed and fear and often blinds participants to the key information necessary for effective risk management. Paper trading bypasses this emotional roller coaster so that the new participant can fully concentrate on the mathematical process, not the pitfalls.

The participant gains experience in every element of the trading process, from pre-market preparation to taking a final profit or loss. When entering the broker’s simulator, he learns how to use the software with real money in a relaxed environment, where winning the wrong hit does not trigger a financial disaster.

Making a series of complex decisions that are rewarded with hypothetical profits goes a long way in building the confidence of the beginner so that he can do the same when real money is at stake.

The paper trading for several weeks to a month creates useful statistics on the new strategy and new approach to the market. The results are likely to be intimidating, forcing the next step in the process of training the new trader, in turn requiring additional data sets and paper trading.

Main Limitations

Now let’s take a look at the limits of paper trading and how it can hinder a beginner’s performance if the key lessons are not learned.

Paper trading ignores the overall impact of the market on individual stocks. Most stocks move with major indexes during times of high correlation, which is common when the Market Volatility Index (VIX) rises. While the results may look great or terrible on paper, broader conditions may have created the results rather than the virtues or pitfalls of individual positions.

Real money traders face all kinds of hidden costs from slippage and commissions. This is exacerbated by the large spreads which are poorly taken into account in most paper trading techniques.

Paper trading does not address or evoke real-world emotions produced by actual profit or loss. In the real world, many traders cut their profits and let losses run because they lack market discipline. These self-defeating calculations are irrelevant when it comes to hypothetical numbers.

Paper merchants choose the ideal entrances and exits, losing the minefield of obstacles generated by the modern computing environment. These shock levels become all too obvious to real-world participants who have watched dozens of technically valid positions ignite as algorithms go into predatory mode and seek their stops.

The Bottom Line

Paper trading benefits new entrants by allowing them to take key steps in risk-taking from stock selection to final exit, but the process has limited value as it underestimates the impact of the correlation of clues and emotional reactions in a typical day market. It also doesn’t address the impact of algorithmic strategies that regularly target the flesh-and-blood crowd.

Nonetheless, most beginners should spend a lot of time trading cards with their new ideas and strategies before risking any real money by gaining as much experience as possible. The exercise will produce excellent dividends, shortening the learning curve and allowing limited profitability much sooner for insiders than new entrants passing on the opportunity.

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