What Is Paper Trading....?

Over the years I have always advise many of my retail clients to spend at least three months paper trading before they go live with real money in the stock markets. Now even though I advise this I have never had a student actually do it. They all give up on paper trading after a few weeks and go live. Why is that?

They become impatient, they think they have mastered it or they think they don't need that much time. There is a good argument for not paper trading first as no matter how much paper trading you do you will never get the emotional involvement that you have when you have a real live trade on. The fact remains however that you need time to familiarize yourself with whatever system you are using.

Finding out you don't know how to operate your dealing system or you don't know the correct terminology to use when speaking with your broker on the phone when trading live is a recipe for disaster. You need time to get used to how to operate your system. Whichever system you use you must know it inside and out. This is part of trading. It is one of your main tools and should be taken seriously.

Paper trading is simply using imaginary money with imaginary trades. In the old days you would look at the financial newspapers and write down the imaginary trades on a piece of paper, which is where the term comes from.Virtually every broker now offers a free demo of their system and will fund your account with an imaginary amount of money e.g. $50,000. This will let you make trades just like you would if it were your own money in the account. The system will also calculate your profit and loss automatically.

Take this time to experiment with the system. Make mistakes. Press the wrong button. Buy when you really meant to sell and so on; it cost nothing at this stage.One last thing on paper trading. Take it seriously. If you can't make money on paper then don't even think about using real money. I know to many traders who didn't make money on paper but for some inexplicable reason thought that if they had real money in the account they would. If you are at all serious about this game, approach it professionally. If you aren't making money on paper go back to the drawing board and rethink your plan.