Little Known Ways To Successfully Paper Trade Options

Let’s face it, paper trading is a necessity for any trader these days to be successful.

The term Paper Trading simply means that you are pretending to trade financial instruments such as stocks, options, and futures using their current prices as would-be buy and sell prices. No real money is put at risk, instead “Monopoly Money” or “Paper Money” is used, hence the name.

Clearly, I believe that paper trading is not only beneficial, but is an absolute requirement of successful trading. This is where most traders start their trading career anyways. It allows you to make trading decisions on paper only, so you can explore and try out different strategies and technical indicators.

Why Do I Need To Paper Trade?

Everyone can read about trading or take a course about trading but until you actual open up a paper trading account with a broker and start placing orders; you will never learn exactly how it works. As the old saying goes, “There is no substitute for seat time.” The more experience and education you have the more profitable you will be as a trader.

Fortunately enough for you, these days paper trading or virtual trading can offer the “seat time” you need without risking capital right away. If used correctly, this could be just the ticket you need to get yourself up to speed.

My 2 Problems With Paper Trading

I have two really big problems with paper trading in general. First, it teaches you (through no fault of your own though) ‘things’ that you would not necessarily do had you been trading real hard money. Subconsciously you see it as a game instead of a learning tool.

I have seen too many students when coaching knowingly over trade with trading sizes that are greater than what they could afford with real money. What’s the point I then! Sure we can all make $10,000 a week trading $3 Million but is that a reality? No way. Therefore, it is critical that you paper trader only trades you would and could trade with real money.

Second, paper traders always seem to focus more on trading profitability, instead of consistency as the guideline of whether they are ready to begin trading real money. Use the different broker platforms to test basic trading setups, make necessary adjustments sample trades and master entry-exit points. Once you start making consistent gains with a proven trading plan, then you can venture off into the real market.

You Have To Transition Over At Some Point!

No matter how many trades you do on paper, the harsh reality is that it will often give slightly false and misleading results. This is because nothing comes close to real-life trading with real money. The emotions and mindset are completely different when real money is being staked, which is why overall I think paper trading is only worthwhile up to a certain point.

For one thing, you tend to make more-aggressive moves when no real money is at stake right? I mean you have nothing to lose so why not. But again you try your best to treat paper trading as if real money were at stake. I know this is hard to do, but the more closely you relate your paper trading strategies to the real world, the more profitable you will be in the long run.

It’s just a verifiable fact that human beings learn best from suffering the consequences of their mistakes. Yet with no real money lost when paper trading, the lessons you should be learning aren’t fully burned into your mind the way a real loss would be.

Who Do You Think Has The Best Paper Trading Platform?

From thinkorswim, TradeKing and TradeMonster to everything in between; which broker has the best paper trading platform and why? Focus on the education you gain when adding your insightful comment below!

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  • http://thevaluemajor.com/ The Value Major

    First off I want to say thanks for following me on twitter.

    I couldn’t agree more about how crucial paper trading is. My personal money may be locked up in fairly safe value plays- but for learning how to do more volatile things I don’t think it would be a good decision to go out and risk my own money just yet.

    To anyone who has almost no investing experience I’d strongly reccomend putting your money in index funds and paper trading for a year+. Then I’d strongly suggest slowly transitioning your funds from the index fund to your trading account.

  • frank

    I would not use any “platform” other than a paper tablet. You write the date, the trade, the fees, and your rationale. This serves as your journal and when the trade performs as thought or goes bad then you have a hard copy and notes. Any free charting service can become a platform. Of course, day trading would be had to do with this format.

  • Kirk

    Wow — AAPL earnings blew out estimates..the company basically doubled in size in 1 year

  • Paul OBrien

    Thinkorswim is a great paper trading platform.
    The analyze tab which allows you to try out scenarios on the profit/loss graph are invaluable. This isn’t unique but the feature of being able to follow the progress of your trade on the P/L graph is the real winner. I can’t believe Optionsxpress with all their innovations hasn’t put this feature in. They only allow you to preview the trade before you make it, as far as I know.

    • Kirk

      I agree Paul. The ability to analyze possible adjustments and then stress test them with volatility changes is truly invaluable for me. I use that tab religiously.