Why Is Paper Trading Important? Here’s the Top 10 Reasons

Why Is Paper Trading Important? Here’s the Top 10 Reasons

PAPER TRADING IS DONE USING ONLINE TRADING SIMULATORS. JUST LIKE COMMERCIAL PILOTS ARE TRAINED USING FLIGHT SIMULATORS, SMART TRADERS ARE LEARNING AND PERFECTING THEIR SKILLS USING TRADING SIMULATORS. THESE SIMULATORS ARE EXTREMELY EFFECTIVE BECAUSE EVERYTHING EXCEPT THE MONEY IS REAL. THE ABILITY TO PRACTICE IN REAL MARKET CONDITIONS WITH ZERO RISK, MAKES PAPER TRADING EXTREMELY EFFECTIVE AND IMPORTANT. 

Table of Contents

  1. Introduction
  2. The top 10 reasons why paper trading is important
  3. Key Points to Remember
  4. Conclusion

Introduction

If you have ever flown in a commercial jet, chances are that the pilot flying the plane spent a lot of time training on a flight simulator. Flight simulators have become an integral part of training for commercial pilots. The FAA even recognizes and even approves flight simulators for training pilots. According to an article by Michael Wildes in Flight Magazine: “I now believe flight simulators and advanced aviation training devices (AATDs) have been the ultimate teaching tools for me as an instructor. It was where I was able to do my best work.” See the full article 

There is no longer any doubt as to the effectiveness of simulators in training pilots. The same thing is now being proven true for training traders. In this article we will explore why it is so effective and why every trader (not just beginners) should constantly be using the simulator to get better at their craft. 

The Top 10 Reasons why paper trading is important

  1. Paper Trading is Very Effective: as mentioned in the intro, paper trading using a trading simulator is very effective. The reason why it is so effective is the fact that in a trading simulator, everything is real. The stocks are real. The market conditions are real. The only thing that is simulated is the money. This makes trading simulators much more effective than even flight simulators where everything is simulated. If simulators are effective in training pilots, then trading simulators are undoubtably effective in training traders.
  2. Paper Trading Removes The Risk allowing you to Learn From Mistakes: In a trading simulator the money is simulated and therefore there is no monetary risk. The no risk environment of the trading simulator makes it possible to trade and not worry about making mistakes. This allows you to learn from your mistakes. This is the real key to effective learning. Everyone makes mistakes and beginners make a lot of them. Make them, learn from them and then try not to make the same ones again.
  3. Paper Trading Allows You Practice in Real Market Conditions: When I first started trading, I was told by the trainers at my firm not worry about losing money, it’s how you learn they said. They explained that as I got better, and my trading improved, I would easily wipe out any losses accumulated in the training process. 

    While this was true, it still was not easy to do. Losing real money trading until you get good can be very demoralizing and make the path to becoming a good trader much harder. The more you practice in real market conditions, the more you will start to truly understand the market and the better you will do. 
  4. Paper Trading Lets You Practice Until You Can Trade Profitably: I have to be very clear here. If you cannot trade profitably on a trading simulator, you won’t be able to do it in the real market. The opposite is also true. If you can trade in the simulator effectively you most likely will be able to make money in the market for real. You must pick your strategy and practice it until you can consistently turn out winning trades.  Don’t rush this process. Learn all you can and get good. Your goal should be to become a good trader. 
  5. Paper Trading Helps You Develop Good Habits: one of the biggest mistakes new traders make is developing bad habits early on when they don’t know what they are doing. Sometimes these bad habits can be permanent. The trading simulator allows you to start developing good habits from the start. The more you practice these good habits, the more permanent they will become. 
  6. Paper Trading Helps You Learn To Make Decisions: most people are poor decision makers. This problem is exaggerated when it comes to making decisions in the market when real money is on the line. Paper trading makes you a better decision maker. This is because in the simulator there is no downside risk to making a decision and being wrong. If you are wrong, so what? Tony Robbins always said, “you have to exercise your decision-making muscle”. The more decisions you make the better you get at it. You can do that in the trading simulator with no negative consequences. 
  7. Paper Trading Helps You Figure Out What Trading Strategy To Use: one thing you are going to learn when you start trading is that different trading strategies work in different market environments. What works in a strong bull market most likely will not work in a corrective or bearish market. The trading simulator allows you to test strategies to see what is working right now and adjust them as needed. 
  8. Paper Trading teaches you to set rules and stick to them: when it comes to trading you absolutely must develop a set of rules for yourself and stick to them! The great thing about paper trading is that you can test these rules to see if they work for you before you set them in stone. You will also be able to understand how you must adjust these rules according to the changes in the market.
  9. Paper Trading teaches you discipline: The venerable boxing champion Mike Tyson had a saying: “Everybody has a plan until they get punched in the face”. Mike was exactly right, but nowhere is this statement truer than in the stock market. The beauty of paper trading with a trading simulator is that you can use repetition to condition appropriate reactions into yourself. 
  10. Paper Trading teaches you Patience: patience is one thing that most people lack (especially here in New York City where I live). It is also one of the most important mindsets that a trader can have. 

    The beautiful thing about using the trading simulator is that you have no risk and can develop patience as you wait for the things you thought would happen to happen. There is no risk so you can sit back and watch to see how it all plays out. 

    Once you have enough experiences that prove to you what works, you will have developed the patience you need to be a successful trader. Nothing like having experience to draw upon so prove to you that it will pay to stay patient and wait. 

Key Points to Remember:

  • Simulators have been proven to dramatically assist in training people for high level skill-based jobs. Traders are now using them to train the same way.
  • Simulated paper trading removes risk from the process thus speeding up learning time.
  • Paper trading allows you to practice in real market conditions.
  • Paper trading allows you to practice until you can be profitable
  • Paper trading allows you to explore and find the strategies that are going to work for you.
  • Paper trading helps you to develop the patience you need to become a good trader

Conclusion

Prior to the internet, the only way you could paper trade was literally on paper. You never knew if the trades were actually executed. The process was very cumbersome and ineffective. Most traders could not stick to the process. Today we have online simulators to practice in real market conditions. Any new or inexperienced trader would be doing themselves a great disservice to not use this amazing relatively new tool.