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The Paper Trade

The Paper Trade
While many people will refuse to take the step of paper trading while they are learning to trade this step is a very important step for beginning traders.  Although there is a downside to paper trading it is still a great learning tool to use. The downside to paper trading is that emotions are not involved so it cannot accurately gauge whether you will be come a good trader when real money is on the line.  Your paper trading results will in no way reflect or predict what you will be able to make in real money. However what we want to point out to new traders is the other side to the coin here. If you cannot make money on paper first you most likely will not make money when your real money is on the line.  In other words why not give yourself the test first. If you pass the test paper trading then you can at least go to the next step real money on the line with limited shares to first get started.  If you do not pass the paper trade test then you are pretty much guarantied failure when you put real money into your trades.  Why waste money learning what you could learn for free on paper Paper trading is the time to perfect your trading plan improve your money management program and prove to yourself that you can execute automatically without hesitation. 

If you pass this test the next step is to move up to trading with real money but as mentioned above with only a very small risk amount. At this step a couple very important things will happen. First your results will probably be worse than those of your paper trades. Why Because you will no longer be faking the entries and exits. In real trading there is no going back and putting in the 'pretend' number. The entries and exits will be real they are locked in stone. When you refuse to stop out because you have lost real money you will hope for a bounce that may not come and instead the stock will head lower resulting is a bigger loss.  In that same paper trade you have no problem stopping out because it is not a real loss and you are not emotionally attached to the trade.  On the flip side you may let a good winning paper trade run because selling for a small profit is not really a profit to you where as in real money terms you may want to lock in the small profit when you have real cash on the line instead of letting that winner turn into a big winner. 

The second step in the learning process after the paper trade is trading with real money but with fewer shares then your paper trading plan called for.  In other words this training period should include trading in say no more than 30% of the amount of shares you would buy normally.  This step alone can save you a ton of cash as you begin your trading career.  Commissions nowadays are very low so it costs the same whether you trade a few shares or a lot of shares.  In this step the commissions will cost you more in relation to your returns simply because you are trading fewer shares but you must realize that commissions at this point are a learning expense.  At this point in your training the goal is to see if you are trading well enough to increase the share size. Not to actually profit yet so saving on commission costs is not the priority. 

Here is a test you could do while in this second step of your learning curve (trading small amounts of shares): After trading with limited real cash on the line after you have successfully passed the paper trade test using your real money trade figures go back to your paper trade record and refigure your real trade record bottom line using the shares size that your paper trading plan called for you using.  This should be equal to the amount of shares you plan to trade 'someday' when you are ready to be a full time trader.  If the increased share size results in a profitable bottom line then you are proceeding on course.  If you are not making money when you use the paper trading figures then do not proceed to increase your real money share size until you are making money.  If you follow these steps it will be difficult to lose large sums of money while you are in the learning process.





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