If you are new to trading, you have probably asked yourself, what is paper trading? Paper trading is a simulated trade using a platform that allows traders to practice buying and selling options and stocks without it risking real money. As we have gathered in other articles, day trading can be scary and overwhelming. To take some of that pressure off, many traders test their strategy with paper trades instead of a live account. This way they get the full experience of practicing trading in the stock market without it affecting their pockets. Online brokers such as TradeStation, Fidelity, and TD Ameritrade’s thinkorswim offer clients paper trading platforms in which you can open a paper trading account to conduct simulated trading.
Paper trade teaches beginners how to navigate platforms and make trades, but may not represent the exact emotions that occur during real market conditions. The reason for this is there is nothing on the line for you. Which is fine because you need to learn to crawl before you can walk. The important thing is to take baby steps; get the trading strategies perfected first, then you can move on to learning to manage your emotions. In this article, we will get into detail, so you know what you can benefit from paper trading to then transition to real trading.
Paper trading is essentially an adult electronic version similar to the board game known as monopoly for kids. The player’s goal in monopoly is to remain financially in the money while forcing challengers into bankruptcy by buying and developing pieces of property. Which a day traders’ goal is to make a profit from buying and selling options. Paper trading like monopoly lets you use fake money to make option purchases. This Paper trading platform you can do from a cell phone, laptop or desktop computer. With paper trading pretending to own the contracts just like monopoly you pretend to own the properties.
Nearly everything about the simulator is the same as their real thinkorswim trading platform, except the trader is not committing real money. The paper trader should consider the same risk-return objectives, investment limitations, and trading limit as they would use with a live account. The reason for this is, that you want to keep the trades as realistic as possible, so you can benefit the most from them. So, if in real life, you want to start trading with one or two contracts; you would purchase the same contract size in the simulated environment.
Unfortunately, the only thing that is not recreated for the full experience with paper trading is emotions. Paper trading gives traders the opportunity to answer questions about themselves before committing hard-earned money into the equation. Using simulated training gives people an idea of how they would react under changing market conditions. Even though emotions play a huge role in day trading; it’s simply not something that can be faked. Simply because what might affect one person may affect someone differently. It is important to control your emotions, rather than let them interfere with your trading decisions.
It has often been said that fear and greed are the true motives behind market behaviors. Other emotions, such as anger and disappointment, are also powerful emotions that influence our decisions. Let’s picture a loss of $500 for some traders this amount they are comfortable losing and for others it might deter them from trading for a few days. Fear of losing this amount or more may set in or anger to try and get their money back; this is referred to as revenge trading. That is definitely not the rabbit hole you want to get yourself in, not only because it may be hard to escape, but the financial loss will be detrimental.
Trader’s mindset can determine the extent to which a day trader succeed in securing a profit. Or it can provide clarification as to why a trader experienced substantial losses. Having a plan before entering and sticking to it is the best way to avoid the sway of emotion in trading. You need to follow a tested strategy, establish a number you are comfortable losing, keep your trade size small and keep a journal to keep track of your progress. These are important things to remember when taking a trip on the road to becoming a successful day trader.
Transition From Paper Trading to Live Trading
I suggest you pick a number that is comfortable for you whether it be 15, 20, 25, 30, or more of practice trades. Once you feel you have perfected using your tested strategy and the majority of your trades were profitable, then now you are ready to transition to live trades. You should also start live trades with one contract to start and consistency on wins. For example, in week one, you traded one contract three times, and you got three out of three profits. Week two one contract two out of three profit now on week three you can consider moving up another contract; so now trading two contracts.
From there, you keep the same thought process in mind until you are eventually trading 10 to 15 contracts a week. Not only are your trades profitable, but you feel comfortable doing so. Remember, your level of comfort may vary from someone else’s; I’m here to tell you that’s ok. Keep practicing, build confidence, and you’ll be in a better position once you enter the real world. This isn’t a competition and in the end, it is your pocket that you are bringing into this and your mental health. You don’t need to rush because you see people moving fast. It’s your journey; life is at your own pace.
Summary: What is Paper Trading?
You learned how playing monopoly as a kid was getting you ready for the big league. How paper trading is a platform designed to help you practice and become successful. You also learned that emotions can’t be recreated, but it will at least be insightful to help you anticipate what you may need to confront once you go live and use real money. You also learned that you’ll need a tested trading strategy to use on the trading platform. In which you can practice entry and exit and be profitable in the stock market.
My goal has always been to help as many day traders achieve their personal financial goals, whether they are novice traders or experienced traders. The MK VIP training has plenty of resources to help you get started on reaching your day trading goals. We go into detail about paper and live trades in my program. I also provide my students with a journal template that they can use to log their progress. I can teach you a simple strategy that if you put in the work and practice, you will be a successful trader for at least 80% if not more of your trades. Furthermore, I can be there to guide you from the transition from paper to live trades and develop a platform where you can ask questions if issues were to arise in your journey.
Maurice Kenny has helped over 600 people become financially free through one-on-one coaching, mentorship, and options trading strategy. Many of these new traders are now full-time traders, and they all started by watching his 1-hr webinar.
Feel free to check out other FREE educational resources to help guide you as you begin your new journey to financial freedom.
Also, download a (FREE E-BOOK) by Maurice Kenny, “DAY TRADE LIKE A MILLIONAIRE.”