Paper Trading Preparation for Real Trading

There are a number of Web sites out there that allow the prospective stock market trader to learn about stock trading through simulated transactions. Whether through the use of such Web services or simply by a person tracking “paper” buy/sell actions, this activity is generally referred to as paper trading.

I personally don’t like paper trading platforms that are termed as “games” as that sets the wrong tone at the onset. Stock trading is serious business and traders should get off on the right foot at the get-go. Platforms that are termed as “contests” (also misrepresentative) sets up the atmosphere of competition to provide motivation and provides a means of measuring success. They also provide incentive to visit, use and stay at the Web site. However, stock trading is not a competition with other traders; it’s an individual exercise to generate profits. Just because you are in the top-10 in the contest could still mean you have net negative loses. Be mindful of your objective which is to progress beyond the paper trading exercise and onto real trading. Stock trading game/contest Web sites can be so compelling and fun that you simply spend your available time staying there.

The paper trading exercise should be structured and carried out to replicate the real trading conditions and situations. You should practice on the stocks that you actually intend to trade. You should use representative capital so that you can get a true sense of your absolute gain/loss amounts (i.e. truly gauge risk-reward). You should use the actual methods that you will be using in real trading to determine trading decisions – fundamental analysis, technical analysis, trend following, entry/exit points, stop-loss points.

Another factor to keep in mind is the psychological element. In paper trading, you can turn out to be very successful because you are so rigorous in minimizing losses in losing positions. With nothing at stake, you terminate your losing positions early because you conclude that you made the wrong entry point decision. In other words, you are on the wrong side of the trend. In the extreme case, you can start over again with a fresh pot of capital. The important question to address is, will you be able to exercise the same level of rigor and sell losing positions early with real money?

If you cannot succeed in a paper trading exercise, it is likely that you will not succeed in real life trading. Therefore, as a first requisite step, find the proper methods to succeed in paper trading. If you succeed in a paper trading exercise, you may still struggle (i.e. lose) with real life trading due to the psychological factors associated with real money.

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