Paper Trading: The Good, The Bad, and The Ugly

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Paper Trading: The Good, The Bad, and The Ugly
Paper Trading is a way of practicing in the stock market under real-time conditions without using real money. This allows you to learn a new system and build confidence before putting real money on the line.
It is common to draw out a strategy on paper for learning and understanding. It is good to always be testing new strategies. A basket of beneficial strategies can be used that fit your style, personality, and goals. New strategies can be implemented, and ideas that don’t work for you can be discarded.
There are advantages and disadvantages to paper trading.
• What is Paper Trading?
• Software has evolved and is now used.
• Also called Pretend Trading, Mock Trading, Virtual Trading.
• Problem: Learning new strategies and methods can be complicated.
• New strategies should be back-tested and forward tested.
• Backtesting can be good for learning and testing but is not done under real-time conditions. The context is lost. You can test many years in just a few minutes. This is good for measuring success rates, yet is bad because it allows us to be isolated from real life.
• Forward-testing helps define the proper context since it takes longer and is more like actual conditions. Each day is different and takes into account the variables of life. We need to practice in a genuine environment.
• Practicing should continue until there is consistent success.
• Problem: Focusing on the winners while ignoring the losers.
• We say that we would not have done the losers and only have done the winners. We can talk ourselves into anything and rationalize if we try hard enough. We can do this to ourselves, or it can come from other people.
• Solution: Use Virtual Trading Software for accountability.
• There are platforms available such as ThinkorSwim (TOS) and TastyWorks (TW), that we can use. Online brokerages often have applications available. Stick with what you feel comfortable using. It is one learning curve to understand a new strategy and another to learn new software. Try to keep things familiar and then implement changes over time.
• Virtual Trading
• TOS and TW are free, but an account must be set up. TOS is from TD Ameritrade. TW is from TastyTrade. Both do not require funding the account. The software can be a real monster with a high learning curve. You can use either or both. There is a lot to learn.
• Decisions are made in real-time without using real money. Think of it like using a flight simulator. Everything is real, but you are not flying a real plane. We can do this with the stock market too.
• This can be a great learning and accountability tool since it keeps track of winners and losers.
• The three big reasons for not getting involved in the stock market are 1. Time 2. Knowledge 3. Money. Virtual trading allows you to develop a skill with real results. This can be used to show others what you have objectively done with real and non-doctored results. Others can potentially be a funding source. The profits can be split however you agree. But you have to be good first.
• Drawbacks:
Nothing can truly replace using real money. There is a time when birds have to fly, pilots must fly a real plane, and traders must use real money.
Virtual trading needs to be taken seriously, or it is wasted time. You have to have respect for what you are trying to do. It is not a game.