With paper trading, no real money is put at risk. Instead, "paper money” is used, hence the name. That said, anyone can read about trading or take a course about trading, but until you actually open a real money 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.”
In today's video, I just want to talk about some of the differences that you should be aware of between paper trading and real money trading. With paper trading, no real money is put at risk, and that's why people like it.
It’s kind of this monopoly money that you can use, hence the name, the paper money that you can trade, and it gets you acclimated to the broker platform and the margin and the markets.
If you’re new to trading or even if you’ve been a trader for a long time, it’s a good way to get your feet wet without risking a lot of money. I’m a firm believer that paper trading is not only beneficial, but it's an absolute requirement of successful trading.
To be honest, I still paper trade new ideas. I do the bulk of my trading with real money, but if I have a new idea or a new way of doing things, I might paper trade that strategy for a couple of months and try to test it out a little bit before I put some real money to use.
Here's my two biggest problems with paper trading for beginners and I think this encompasses a lot of different things that hinder your ability to make the leap between paper trading and real money trading.
The first thing is that it teaches you to do things you normally wouldn’t do with real money. This is the number one thing for me because with paper money, you usually get this account that's $100,000 of paper money and it's just not realistic.
It’s paper money; you know that it's not real money, so you end up making trades that are more aggressive than you normally would, you end up getting out of trades maybe slower than you normally would.
And it doesn't teach you that much because you don’t have real money on the line, skin in the game. That's the first thing, is that it doesn’t teach you. It teaches you to do things that you normally wouldn't do with your account.
Number two is that market fills and pricing are instant when you paper trade. This is true of the Thinkorswim broker platform, their paper money account.
When you enter a trade, as long as the market is open and your price is very close to where the market is trading, you’ll instantly get filled, and you’ll instantly get filled at your price because it’s just paper money, so they don't care about real fills.
But when it comes to real money trading, market pricing and fills are extremely important. In fact, we did a huge tutorial on just how much money you can lose on slippage, not trading liquid products and it's amazing.
The difference that people tell me about when they go from paper money trading to real money trading, they think that they can get in and out of all these markets quick and at great pricing and it’s just not the case.
I think that's the number two thing on my list here because that makes a huge difference in your ability to be successful, is the ability to get in and out of things quickly at great prices.
Now that said, everyone can read about trading or take a course on trading, but until you open up a real money account with a broker and start placing orders, you will never learn exactly how it works.
This is what everyone always talks about. As the old saying goes, there’s no substitute for seat time. The more experience and the education that you have, the more profitable you will become a trader.
That doesn't mean that you have just to start out investing all of your money, but putting some money at risk is a really good thing because then, it ties your emotion into the game and that's really important.
Here are a couple of tips I have for paper trading to do it right. If you are going to paper trade, you want to paper trade which I think is a good idea, let’s make sure that you do it right, so here are my top four tips.
Number one: Resize your paper money account down to mirror your account. I think it's insane that when you open up a paper money account that you start trading with $100,000 or $200,000 because you can set whatever price you want.
What you ideally should do is resize that paper trading account down to what you're going to trade or even less, and then if you can make money with less money paper trading than you have in your real account, then you’re probably ready to make that jump over.
Number two: Automatically reduce fill prices by $5 across the board. I would even say if you can successfully do it and reduce prices by $10 across the board, that’ll give you a little bit better idea of what will happen in the market when you go to real money trading.
Number three: You’ve got to stick with the system and treat it like real money. I know this is hard because you know it’s paper money, it’s fake money, so my tip here is making a side bet with your spouse for competition or a brother, a sister, a friend, a co-worker, it doesn't matter.
Make a side bet between you two. They don’t even have to be traders. Just say, “Hey look. I’m making this bet. I’ll bet you $100 that at the end of six months I have more money in my paper trading account than I had, to begin with.”
That’s all you should be doing, is just trying to make a profit or even turn everything over and stay even in your account as you get started.
But helping to do that is by making that side bet with a spouse or somebody else, a brother, a sister, a co-worker to keep you accountable to the system.
Number Four: You’ve got to put real money at risk sooner than later. While I suggest absolutely that you have to start paper trading right away if you’re a newbie or even somebody who’s been in the business a long time and starting to trade new strategies.
I think that at some point, you have to put real money to risk even if it's only $1,000. I say after you’ve paper traded for maybe two weeks of three weeks as a beginner and you have the system down and the basics down, go ahead and put some real money to work.
Open up an account with $1,000. It doesn't mean that you trade all $1,000, by no means, but maybe you can make small directional trades that are $50 or $30.
There’s very small trades that you can do where you get a little bit directional, you’ve got good risk reward, and that’s how you get started in the markets and make that leap from paper trading to real money trading.
As always, I hope you guys enjoy these videos. If you have any comments or questions, please add them in the lesson page below. Until next time, happy trading!