Value of Paper Trading

Now let me get the main argument for paper trading out of the way. The bad wrap that it gets is simply that there are no emotions involved.

Well hey if you are down, $2000, or $5000 dollars in a paper trading account, it’s not real money, right, you may not care on paper, but in reality, it matters.

Or what about if you are down $5000 and it comes back and you make a profit, is that realistic of the conditions you’ll replicate in a real account, with your actual money?

Very, very unlikely.

The real point is you would never let a trade go $5000 against you before selling because you’ll eventually blow up your account doing that.

When you don’t practice first and paper trade and you jump in with a $50,000 or $100,000 account here is what ends up happening. You’re not under the PDT rule of course which is good, but you increase the chance that you go wild. At some point, you will start averaging down, get emotional, or add to a size you never thought you would go into. 

Your trades will eventually go against you and you lose 3, 5, or 10 times the amount that you ever thought about.

The key is to start small and slowly increase on paper or in a demo account because it is going to help you practice and implement the rules that you’ve learned to follow.

So prove it to yourself, make sure the trades you are making are making sense and making you money in your demo account.

Again small size, you’d rather be burning commissions a few dollars at a time while you are starting out and learning, as opposed to burning hundreds if not thousands of dollars.

The point here is you can do 100 shares to start and then confirm. Are you consistently buying low and selling high? Great, then you can go to 200, then 500 or 1000 shares, and you’ve slowly geared up to where you need to be and trade with a size that you are comfortable with.

This is how you want to start out in your demo account and eventually when you do trade live you’ll be in a position to adopt that same initial approach.

When it comes to paper trading, TD Ameritrade is probably the best place to be. TD Ameritrade offers their PaperMoney account on their thinkorswim platform. It gives you the ability to practice, to be in the market in real-time. You will have the ability to optimize your layout with watch lists, Level II, and more. It’s a good opportunity for you to get a simulated real experience.

But again trade as if you are risking real money so that way you can refine the way you trade the strategies you are learning.

Let me emphasize this. I didn’t do enough paper trading when I started. I jumped right into a live trading account. My cost of learning was over $40,000, trading untested strategies. I had some really, really bad days in my first year trading and I certainly had days where I made thousands of dollars, but I also had days where I lost thousands of dollars over the course of that time. I was losing more on average than I was winning in my eagerness to make money trading.

When you start with a paper trade account be sure and ask at a minimum these three questions.

What’s my strategy?

How do I manage risk?

What’s my goal for the next six months?

Now, during the time you are paper trading, remember your education comes first. You want to educate yourself. You want to be an independent trader, you want to be your own ATM machine where you can find stocks, trade the setups, and generate income day after day.

Now I trade for income. I’m not a speculative trader trying to make a million dollars by buying some random penny stock or option call. I’m trying to make a couple hundred dollars a day consistently for income and I’ve proven that that’s achievable.

But you have to understand what your goals are and what you want to get out of the market. 

What I want may not be the same for you or everyone, but if you want to trade for income, it’s really not a good part-time hobby because it takes so much time and energy to learn that you know by the time you’ve achieved the level of skill necessary to be profitable, you’re going to be able to make so much money.

So you have to build your foundation. The market will be here, it’s not going anywhere.  If you can make money in a simulated trading account, you’ve built the skills to make money in a live trading account. So there shouldn’t be any rush or a sense of urgency.

And if you don’t, then you know, you may not make it to the point where you’re able to get past that learning curve and be successful.

There will be some traders that come in and within a couple of weeks, they’re trading profitably, making lots of money. And that’s awesome.

That wasn’t the case for me when I started, it took me a little longer, and it may take you a little longer too, but that’s ok.

Everyone’s unique in terms of the learning curve and the most important thing is building your foundation. Paper trading is the best way to do that.

Next: Growing An Account »