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!

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