Let’s face it, paper trading is a necessity for any options trader 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 fake 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 options strategies and technical indicators.
Why do I need to Paper Trade?
Everyone can read about trading or take a course of 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 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) 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 knowingly over-allocate and place trades that are far greater than what they could afford with real money.
What’s the point?! 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 using 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 and 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 put "Skin in the Game" eventually
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 (i.e. skin in the game).
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 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. But 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.