logo
  Join        Login             Stock Quote

The Wisdom of Paper Trading

 August 09, 2007 12:13 AM


 You've been to the library and various bookstores, maybe you've even subscribed to a trading course or two, and you've been watching markets on your own for a while. You feel confident. You feel ready. You feel lucky. Time to start trading, right?

Despite these seemingly auspicious beginnings, most first-time traders who trade without broker assistance lose money and do so fairly quickly - usually within six months. Some were unprepared for the volatility that can appear from nowhere. A tell-tale sign of this is failing to retain sufficient cash in the account as excess margin. Some fail to invest wisely, such as spending all of their cash to purchase a large number of cheap options. Some weren't as knowledgeable as they thought they were. Costs can be significant, for example, if a deliverable contract is held into the notice period.

[Related -8 Stocks to Beat Warren Buffett's Portfolio Return Easily]

Others made classical errors with order usage. An example of this is using a limit order when a stop order would have been appropriate. Still others lose their objectivity at the most regrettable times. Examples of this include moving a stop order to allow for larger loss, or adding to a losing position. And, of course, contributing to the financial demise is the mystery of why prices often move in the opposite direction of what was expected.

Unfortunately, by the time the trader has begun to develop some kind of defense to the pitfalls and problems described above, usually in the form of hard-earned trading rules, the cash in the account is too low to continue. What is needed is a training ground on which mistakes can be made and lessons can be learned without wiping out trading capital. Such an educational tool exists and is called paper trading.

[Related -How the Chinese Slowdown Will Impact Your Investments]

Paper trading is fictitious trading meaning that buy and sell transactions are not carried through to completion in the trading pit. The trader does not have the market exposure of an actual position and so, does not have the associated risk. However, trades are filled and recorded as if they were for real. In order to be beneficial, a paper trading account should have the following:

1. Legitimacy. Third-party involvement is important. When people paper trade on their own, it's too tempting and too easy to look back at a chart and say, "Oh yes. I would have bought there." Paper trading without third-party legitimacy has little value.


Next Page >>12


Common Types of Orders Using Fundamental and Technical Analyses to Predict Prices
iOnTheMarket Premium
Advertisement

Advertisement


Comments Closed


rss feed

Latest Stories

article imageHow the Chinese Slowdown Will Impact Your Investments

Most countries would find a quarterly growth rate of 7.3% a cause for a read on...

article imageHow To Profit From Foreign Investment In Real Estate

Though investors don't always capitalize on it, history has a way of repeating itself. In fact, when I saw read on...

article imageAnother Round Of Upbeat US Macro Reports

The US economy grew faster than expected in this year’s third quarter, according to this morning’s read on...

article imageDistinguishing The Fed's Securities Purchases From Monetary Expansion

There has been a bit of confusion about what today's FOMC announcement means with respect to Quantitative read on...

Advertisement
Popular Articles

Advertisement
Daily Sector Scan
Partner Center

Related Articles:

Gold: The Ultimate Store of Value?
More Articles on: Learning the Ropes



Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.