Getting the Most Out of Simulated / Paper Trading

If used correctly, simulated/paper trading can save you stress, turmoil, and thousands or even tens of thousands of dollars. Many brokers offer a trial period to learn their software while paper trading with live market data. Others offer a more permanent paper trading option with either monthly fees or as an add-on to a live account (InteractiveBrokers and
TD Ameritrade’s ThinkOrSwim offer those services, respectively). ThinkOrSwim even lets you play back historical market days and trade them at will!

Once you sign up on one of these accounts, you’re generally able to start paper trading that same day or the day after. You’ve signed up, your software is installed and configured, and you’re watching live price data stream in on your platform. What now? Do exactly what you would do if you were live trading! Sounds easy? It isn’t. In a loss-free environment you have to hold yourself to the sames strict standards you would if you were live trading. That means you need to create a watchlist based on your parameters, study the fundamentals / technicals to note important levels, formulate trading plans for each symbol, and determine a realistic and safe size to trade with.

This last step is one that is ignored frequently during simulated trading. You may start off with a realistic size, but after a small loss or two, you give into the temptation to increase the size to try and make back what you’ve lost. When that doesn’t work, the process just repeats itself with bigger and bigger size. Maybe that last time, finally, the trade goes your way. You make your money back and call it a profitable day. Great, right?! No! This does nothing for live trading skills, and it is therefore a bad strategy to practice. This is how live accounts get ruined in a single day.

The other mistake is taking massive, unrealistic size from the get go. With so many shares, you can hold a position just long enough to capture a few cents of movement and call it a day with a good profit. But could your real account handle a trade of that size if it went against you? Chances are that with such an enormous position, one losing trade would be an account closer. This type of carelessness while paper trading instills bad habits and is more or less just a waste of your time.

There’s a huge advantage offered to those who do keep their paper trades as close to real trading as possible. Once you do that, you’ve made a big step towards a successful trading career. The same emotions of live trading should be mirrored in paper trading. Losses should be small and stopped at predetermined stop out levels. Winning trades should be ridden and scaled out of for maximum profits. Once you’ve become consistently profitable for an extended period of time (preferably months), you’re ready to start live trading with small size. Paper trading is an invaluable tool for those who are willing to put in the time and effort to do it realistically. We hope you can take advantage of it!

Top 5 Mistakes to Avoid as a New Day Trader

The failure rate of new, would-be day traders depends on the source, but you’ll notice that most sources indicate 80-95%. With that in mind, in this article we’ve attempted to identify some of the primary contributing factors of theses failures. With some awareness of these pitfalls and a little discipline, you can make your own concrete set of rules to help mitigate these account killers!

#1 Trading without a plan

If you’re quickly flipping to view a chart on symbol for the first time during the day, and within a few seconds you say to yourself, “this is going up!” and then you click to buy, chances are that your day-trading career will be short lived. Successful day traders take the time to see what symbols are in play for the day and then analyze those symbols one by one while noting important price levels, potential entry prices, potential take profit prices, and potential stop prices. Before entering a trade, there is already a plan in place to minimize risk and maximize profits. This is a trading with a plan. Trading without one can be reckless and put a premature stop to your trading career.

#2 Trading with too much size

We’re all anxious to get the ball rolling and start bringing in super fat paychecks from our day trading profits, but with this mentality, many new traders take over-sized trades. Taking too many shares in relation to one’s account size is a quick way to blow up a new trading account. Part of a successful trading plan includes deciding how many shares you can buy/short while being able to tolerate the planned stop loss if the trade goes against you. If you take a position of such size that your heart-rate goes through the roof with every tick of the price, you’ve taken too much size and are now trading with more emotion than logic. Aside from adding undue stress to your life, this mistake is a sure way to end a trading career before it has a chance to get off the ground!

#3 Letting losing trades run

“It’s going to turn around soon!” “I’ll stay in just a bit longer!” “Surely it can’t keep going this way…” These are last words before a forced exit on a losing trade, and often before an account gets blown up. There are often times a variety of factors, including lack of an exit plan, too much size, and a violent move of the price in the wrong direction, that contribute to a person freezing up during a loss on a failed trade. You’re caught in the middle of a massive loss wondering how it got this far, and thinking there’s nothing to do but wait until the price turns around, but it doesn’t. Eventually you’re forced to exit the trade with a large part of your account gone. The market ha no biases, no feelings, and it absolutely does not care whether you are winning or losing. Follow your preset plan and get out of your position at your predetermined stop-loss level to minimize the damage the market can do to you. Take the small loss and live to trade another day!

#4 Revenge Trading

After taking a loss on a trade, it’s a natural reaction to be emotional. Maybe you’re confused why the same setup works every time you don’t take the trade, and now that you’ve tried it, it behaves oppositely. Or even worse, you get stopped out on the trade and immediately the price starts going the direction you wanted. It’s annoying and frustrating. You decide to take another position, and it goes against you again. Getting attached to a symbol like this is a losing game. It’s called revenge trading, and it spins out and turns what would be one or two small losses into a massive red day. It is best to move on to another symbol or wait for a better setup, or even another day altogether. Again, it’s about minimizing losses on red days and growing, or at least preserving, your account on better days!

#5 Cutting Winners Short

We’ve talked a lot about minimizing losses, but on the other end of the spectrum, cutting winning trades too early can also be a huge problem for new traders. Naturally, after taking some beatings on a few trades, seeing a trade turn profitable is going to create emotions that scream “take profits, now!” Instead, stick to your plan! Maybe scale out and take some profits, but leave some of your position unless a clear signal is given by the price action that the trend is changing. You’ve made a good trade. Let it work for you and maximize your profits. Holding losing trades and dumping winning ones is human instinct. Practice, practice, practice against this. Trading pure price action without emotions is the path to success.