Paper Trading – Good or Bad?
Many traders start their learning process in the markets with paper trading, which means trading stocks, futures, options or forex without putting real money on the line. You can do this by looking up some quotes, and taking a virtual position, and seeing how it fares without opening a real trade, or you can use one of the trials offered by brokers.
Whilst this obviously eliminates the financial risk of losses, does paper trading benefit you, or hinder you in learning to trade? Read on for more information.
I’d begin by saying that the answer as to whether paper trading is of value is not a clear “Yes, it is good” or “No, it is bad”. The answer is closer to “It depends”. Paper trading has benefits and drawbacks. Paper trading is of value if you understand its strengths and limitations, and use it accordingly.
The upside of paper trading is that you can get initial exposure to the mechanics of the market without risking any money. For example, you can learn how to set stop losses, and how to buy and sell.
Also, you get to see the behaviour of the market under different conditions. By observing the market, you can start to obtain some insight into the ebbs and flows of the market.
Of course, paper trading is essential as part of backtesting a new model. Once you develop your model based on historical data, it is often worthwhile to paper trade it against the live market in real time. This quickly determines whether the model will be profitable against a new situation that was not used in development. You need to do this “walk forward” testing to ensure that your model is robust enough to put money into.
You will have noticed that I am trading the FXCM Forex System Selector against a demo account. This is because it is purely mechanical system and I am trying to test its profitability. My tests of this are in the Automated Trading category.
So paper trading is good for understanding basic trading techniques, viewing the market and how it responds with a position, increasing your confidence and for backtesting. But the main problem with paper trading is that it does not allow you to develop the emotional stance and control to handle the highs and lows of real life trading when your own money is on the line.
In contrast to the FXCM Forex System Selector test, I tested (unsuccessfully) the Forex Runner model (which is not an automated model) using a live account (results and impressions detailed in the Trading Systems category). This is because I would like to be able to report how it goes as a tradeable model, which means that the elation of winning and the disappointment of losses are also a factor for other people may consider buying the package.
Pages: 1 2
Tags: Learning to Trade, paper trading