Paper trading (simulated trading) can be of significant assistance to novice traders as a means of enabling them, without risking any real money, to acquire a feel for the markets and to try out various trading techniques and systems prior to committing any capital in “real-life” trades. In other words, paper trading gives one the opportunity to practice and gain valuable trading experience without the risk of losing real capital.
There are numerous Web sites that permit you to do fictitious trades with an instrument of your choice. Some of these are offered by software companies that specialize in paper/simulated trading and some of these are offered by brokers. We recommend that you use both. The specialized plat-form free tools mostly give you the trading experience you need in a compressed high speed format. This way you can gain say 4 years of trading experience in few weeks. Trading simulators from brokers don’t provide high speed simulations but they provide you with familiarity with their own platform which is very important if you are planning to use that particular broker.
Many direct-access brokers will allow you to open an account in “demo” mode using live market data and a direct-access software program. You can use this “demo” account to learn how to use the various software features and to paper trade in a realistic environment. Only problem is these brokerages are mainly interested in getting you place real trades as fast as they can (that’s how they make their money) so they do not expect you to paper trade for years before taking the plunge. Also to gain years of experience with these platforms will literally take years since they allow you to trade only at market speeds. Specialized daytrading simulators can shorten this learning curve considerably by allow you to trade many times faster than real markets. The advantages with these platforms is that you are not under pressure to trade and you can take as much time as your schedule permits.
Paper trading is useless if you are not simulating real-life day trading as much as possible. For this reason you should try to approach paper trading as if you were committing real money. This involves setting up a plan dealing with such items as:
entry & exit points
stop loss limits
your desired risk/reward profile
amount of capital to be committed to trades
How long should you paper trade before commencing to “real-life” day trade. There is no set rule in this regard. You should continue paper trading until you become completely comfortable daytrading and confident in your ability to use such techniques as “limit orders” and “stops”. Most people should, in our view, paper trade for at least 6-8 weeks with a high speed simulator (few years of trading to gain daytrading experience) and then about 4 weeks with a brokerage simulator (mainly to become familiar with the tools) before they trade in the real money environment. Please read our article Steps to profitable daytrading to learn about our recommended steps in this regard. There are other articles, links on site that offer more information about recommended brokerages, high speed trading simulators etc.
It is important to note that success in paper trading does not ensure success when trading in the real market. Many have observed that it is generally easier to profit in a paper trading environment than in the real markets – in large part because emotions tend to cloud trading judgments when real money is at risk. Nevertheless, the proper use of paper trading can be a very useful tool to increase your likelihood of success (or limit your losses) when you begin trading for real.