Before we look into the top 10 reasons why it’s vital to paper trade before you invest in stocks, let’s clear up a few things. First up:
What does it mean to Paper Trade?
To paper trade simply means to pretend to trade using real market data (and fake money) in order to practice trading before you begin. When you paper trade, it’s like you’re trading with paper money or monopoly money. You will trade exactly as you would if you were trading with real money, however you would only use paper money, (or fake money) hence the term paper trade.
When you begin to paper trade you will be given a fake monetary value in which to trade with. If you have your own trading software it’s best to trade with a realistic amount of money (i.e. the same amount of money as you will when you use real money). The reason you do this is because if you paper trade with a realistic amount, you are more likely to make decisions as if you were trading with your real money. Another point, which you might like to take, is to treat the money in your paper trade account like you borrowed it off your grandmother and you’re terrified of losing it.
Obviously you don’t want to focus on being fearful of losing your money, (even though it is only paper trade money) however that is probably the closest example of the feeling you get when you trade with real money. I assure you there will be nothing that will prepare you for the feeling of trading with real money; that is something that you will develop when you get to it. That having been said, breaking through that fear is rather rewarding and the fear itself shouldn’t put you off trading. Moreover, if you paper trade, you can get a feel of how trading works before you put your money in the markets.
The second thing we need to clear up before looking to paper trade, is that:
When You Paper Trade, You Must Take It Seriously
Even when you paper trade, every trade that you make must be made as if you were risking your real money. If you wouldn’t buy XYZ (a fictitious stock) with your real money, but you have a hunch that it’s going to go up, then you’re not paper trading you’re just having some fun. Everything you do should be exactly as you would do it if you were trading real money, except you are using paper money. Paper trade like you are trading with your real money.
Why It’s Vital to Paper Trade
1. Learn the Markets: The number one reason why it is vital to paper trade is to give yourself a chance to learn the markets. I don’t care how good you think you are, trading live (with real money) without taking the time to paper trade first is suicide. You need to be able to get an understanding of the markets and how they operate. Trading is not gambling; it is an analysis of probability and speculation.
2. Find your Strategy: Before you trade with real money, you need to be able to paper trade to find your strategy. How can you possibly know if your trading strategy works until you try it out for yourself with real market conditions?
3. Make Mistakes: The benefit of paper trading is having the ability to make mistakes. Every new trader makes mistakes, and I assure you, you won’t be happy about making mistakes when you trade with real money. If you paper trade first, you are less likely to make mistakes that will cost you money and you will be able to control your trading much more.
4. Find your Habits: Every one of us has habits. Some of those habits can be detrimental to trading. If you paper trade before trading with live money, you can find your bad habits and iron them out. It’s much easier to change your behavior and habits when you’re not risking real money
5. Test and Measure: Trading requires you to constantly test and measure not only your trading strategy, but your mindset. The markets are always changing, and what works today, might not work in 6 months time. Likewise you need to test and measure your behavior as a trader. 80% of a trader’s success is due to their mindset. If you paper trade, you can learn how to test and measure, and develop your skills to change quickly then you’re going to be much more astute in the real marketplace.
6. Master your Mindset: Like I mentioned above; trading is 80% mindset and 20% strategy. There is more to trading than picking stocks, it is a mind game that you have to master, and unless you master it (or at least learn the basics) while you paper trade (before you trade with real money); you’re almost guaranteed to lose money in the marketplace.
7. Learn new Strategies: The markets are never the same; they are constantly changing and require you to develop new techniques and strategies regularly. Even experienced traders will paper trade in order to test and develop new strategies or techniques. Every time you create a new strategy or technique you should paper trade it first to make sure it works.
8. Lose money: Part of being a successful trader is having the ability to lose money. Not every trade you make will be a winning trade. If you paper trade, it gives you the ability to learn that you will have losing trades without affecting your real results. You need to be able to deal with losing money, and know that another trade will be just around the corner.
9. Make Money: Although it might sound odd, some people have some pretty bizarre associations to making money. Often people feel guilty if they make too much money, or they have a buffer where it becomes too uncomfortable. You need to learn to accept more money in your life and if you paper trade, it lets you do that without risking any money of your own.
10. Get Consistency: Finally, the last reason why it is vital to paper trade, is to get consistent results for your trading. Anyone can make money in the markets, but only successful traders will make money consistently. Once you can make money consistently in the marketplace when you paper trade, you know that you can take it to the next step and make real money in the markets.
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