Learn to Trade Under Real-World Conditions Before You Trade For Real

Foreword: Day trading as a profession, or a side hustle, requires constant attention to detail. Volatility is a necessary ingredient in this equation. The greater the price fluctuations, the better. A risk-on approach is a prerequisite for entry to day trading, and that means you must be prepared for gains and losses.

To the astute trader, it is widely known that success is more about knowledge acquisition in the financial markets than it is about pure profits. In the words of legendary business mogul Peter Lynch, ‘In this business, if you are good, you’re right six times out of ten. You’re never going to be right nine times out of ten.’

Such is the proclivity to espouse a perfect trading record among newbies, that many lose sight of the fact that trading success is never about getting straight A’s on a report card. Rather, trading success should be perceived as the knowledge that is acquired when making profitable trades, and the lessons that are internalized when trades don’t go your way.

We live in an activity-driven culture of traders where a pervasive belief that more trading activity for increasing amounts of money is better. In reality, quite the opposite is true. Less is more. In the words of forex legend Bill Lipschutz, ‘If most traders would learn to sit on their hands 50% of the time, they would make a lot more money.’ Yet novice traders continue to barrel ahead, ploughing increasing amounts of money into each trade that they make.

From a psychological perspective, the desire to trade is born from a desire to generate lots of money in double-quick time. Rather than risking scarce resources, trading gurus like Timothy Sykes are staunch proponents of paper trading. As its namesake suggests, paper trading is simulated trading under real-world conditions. In other words, you’re making exactly the same trades without risking a cent of your bankroll.

What Are the Pros of Paper Trading?

pros and cons of paper trading

Paper trading mirrors real money trading in every way, except one – no real money is exchanged. It’s like playing Monopoly. You have all the real-world experience of market mechanics, except that you don’t risk any of your capital in the process.

This simulated trading experience is the single best way to understand how to buy and sell stocks as a day trader. Real-time pricing, real-time news, and real-world conditions are standard with paper trading. You get to test different trading strategies under authentic market conditions.

Paper trading is one of the most useful tools in your arsenal. Penny stocks trader Timothy Sykes, explains paper trading as follows:

‘…Today’s paper-trading platforms look and feel nearly identical to real trading platforms. So, you can get the feel and sensation of executing a trade. … A virtual account comes with a virtual cash balance to trade with. The amount varies on the platform. You may start with $500,000 or even $1 million.’

Sykes is a proponent of knowledge-based trading, as he routinely underscores the need for a sound strategy and understanding of the financial markets. Paper trading is one such resource that clients can tap into to get a feel of stocks trading under real market conditions.

5 Advantages of Paper Trading:

  1. Ideal for testing trading strategies
  2. Your mistakes won’t cost you anything
  3. Zero risk of loss as no real money is exchanged
  4. Simulated trading of stocks under real market conditions
  5. Highly effective way of learning the ins and outs of a trading platform

The Switch to Live Trading

Ultimately, all of your paper trading sessions are geared towards live trading. The lessons learned while paper trading can be put into practice in real-money trading. Provided you trade with caution, noting your successes and your failures, there is no reason why you cannot seamlessly transition from paper trading to live trading. Rather than viewing these two options as discrete, they are better perceived as continuous on the spectrum. Amateurs and professional traders alike can benefit immeasurably from practicing trading strategies under real-world conditions first, then switching to live trading.

One thing that you cannot escape from when paper trading is the fact that you are not trading for real money. This has a dramatic effect on your approach to trading. Whenever real money is involved, there is much more emotion in every trade. No matter how hard you try, it will be extremely difficult if not impossible to elicit the same response from trading faux money versus real money. Expert traders make logical decisions. They are not emotionally invested in their trades; the objective is to time the trade right, exit the trade once you’ve hit a pre-determined profit, or cut your losses before the trade tanks. Emotion must be kept out of the equation.

There is no room for regret in real money trading. Once a decision has been taken, it’s over. Do not lament the fact that you could have made more money, or that your trade went south. Trading is a numbers game, with incremental gains over time. Small profits on 50% – 70% of your trades can add up to a substantial take-home profit at the end of the month. Many novices hope to strike it rich on just one trade, but that isn’t trading – that’s gambling.

Too many traders end up getting burned before they know what’s hit them. That’s why it’s so important to build on a solid foundation. The global marketplace provides plenty of opportunities for learning, with technical and fundamental analysis, macroeconomic indicators, geopolitical events, financial reports, and company news. Paper trading is an invaluable component of this learning curve. It teaches important lessons about market mechanics which cannot be learned in any textbook.