Paper Trading Part I - Why Paper Trade?
Paper trading has long been a way for individual investors to get their feet wet in the market. It involves giving yourself a set amount of fake money, and treacking your own virtual trades in the market. People use this to test out trading strategies, learn about stock technicals, or sometimes just for fun. In this blog, the first in a series on paper trading, I'll explain why it's important to paper trade.
Of course, paper trading is for people who think they want to manage their own investments. If you don't want to manage your own portfolio, you might be better off choosing a low fee mutual fund and sticking to that. If you do want to try your hand at managing a portfolio, try on paper first, protect your hard earned money while you learn.
Paper trading involves making virtual trades, and tracking those (on paper for instance) without ever putting a dime of your money in the market. You could do research, figure out you think a particulr stock is about to make a move upwards, and track what you would have done.
For example, I do my research and think the stock ZZZ is going to report good earnings for the quarter and will move up 5 points. I can write down on my piece of paper that I bought 1000 shares of ZZZ on April 14th, 2005 at $23.50 per share. I then watch the stock and decide to sell at $30, I just made $6.50 per share, or $6500.
It's all on paper though, and although in this case I missed out on a nice return, I also missed out on the risk of the stock tanking. Paper trading will allow me to test my strategies on the real market, without putting any of my money at risk.
To be honest, most people who paper trade realize they have no clue (because they lost so much with their picks) and decide to go with a managed portfolio. But ask yourself, is it better to realize you have no clue with fake money, or your real hard earned cash?
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So you've read my first two blogs on paper trading here and here, and you want to jump in with both feet and get started, here are a few resources you can use to guide you through it. Read
In my first blog about paper trading, found here, I described what I thought the advantages of paper trading were. If you agree that paper trading is a good idea, you'll want to read about my views on keeping the discipline. An undisciplined paper trade ... Read
A few days ago, I blogged about UPromise. An alert reader, KB, pointed out that Babymint has a similar program, so I headed over to check it out. I will detail the differences here. Read
Being a new dad, I fill my time between feedings and changing diapers reading up on how I can successfully get rid of my child and relive the peace and quiet I enjoyed before she was born. From what I've discovered, I can send her ... Read
Nathan, I'm glad you included that second to last sentence - that most people who paper trade realize they have no clue.
There is absolutely no substitute for putting your real money on the line. I've become a fairly successful trader and investor (at least as far as I'm concerned) and I can tell you that for the little time I did paper trade I did very well. So well in fact that it led me to start trading more aggresively for real dollars. It didn't take too long for me to realize that the emotions of trading CANNOT be replicated on paper. Paper trading is okay, but if you really feel like you want to be able to invest your own money there is no substitute for the real thing.
I think paper trading is good for honing one's technique for picking a stock, and BA is right about emotions not be replicated. But if the emotional aspect is really that important, you have to ask yourself how much of your motivation is investing and how much is speculating..
FYI: here's a great site for paperless paper :
http://simulator.investopedia.com/
PS: Great blog Nathan - thanks for sharing!
BA and FoB,
I agree, and will cover this is a future blog about the discipline of paper trading. Losing fake money doesn't hurt anyone near as much as losing real money, and you have to hurt to learn. But paper trading will let you know quickly if you are in over your head.
Great points though, and good resource for paper trading. I didn't know about that one, I have a couple IRAs (wife's and mine) at optionsxpress.com and have been using their paper trading.
To address the point on speculation - I think this primarily depends on if you are trading or investing. Trading stocks in a shorter termed fashion will yield much more emotions than a longer termed investment. I'd say for a long term investor you are better to just jump right in, whereas for traders there is a larger benefit experienced in paper trading.
