During numerous discussions trade on paper and its implications as a learning tool, we usually see participants, divided into two camps. The first speaks of the total uselessness of paper trading., another vows not to start trading without it. Mocking Camp Points to Obvious Limitations of the Paper Trade:
- It does not allow to evaluate slippage during trading.
- This leaves unanswered the question of whether, does your order the ability to be fulfilled at all.
- It keeps you in a relatively relaxed state of mind., since there is no pressure, endangering real money.
- It also prevents you from fully mastering your tools. aboutsending orders.
- Finally, it's very easy to fool yourself, changing the decision after the completion of the transaction and adjusting the results.
Let's try and build trading rules on paper, which will enable us to turn it into a powerful learning tool. We can identify three cases, where paper trading is used instead of real for the purpose:
- Newbie, kicking water.
- Trader, testing a new trading system.
- Trader, fallen into the losing streak.
Trading on paper makes it easier for you in real trading and see if your theoretical approach works. This is the stage, where you start to measure your method against market movements. You will have ample time to review psychological pressure and performance techniques later on., adding them gradually, since you start trading with low volume. but, before real money is used, theory must be verified by reality, and this first experiment should be painless for your trading account, насколько это возможно. Obviously, trading on paper does not pursue any meaningful goals, if your trading system is built this way, that you can test it, thus, starting by building your trading approach, and then continuing testing it in the mode real time.
Trading on paper is built in a fairly simple way. This is a simulation of your actions without actually sending your orders to the market maker. You define your setup with all its components: signal for the entrance, stop level, signs for exit, the possibility of partial exit and pull-ups. Then, watching market action, you simulate your ins and outs, writing them down. This will be your first meeting with the market, so take it seriously. Trading on paper teaches you a lot about market action without scouring your money., if you follow closely and act responsibly.
Watch, do your setups. If you are losing money on paper day in and day out, there is something wrong with your approach. Try to make corrections, find what factors you did not consider. This is the stage of fixing errors - looking for problems to fix. If you receive a negative result, don't be discouraged - it is much better to know about the problem before transferring real money to a dubious method.
Watch, does yours work risk management. You lose within your defined limits on any trade and on any day? Maintain discipline at this stage - your future trading results will be at risk, unless discipline has become your second nature.
The all-important purpose of paper trading is, to figure out the maximum rollback, which you may encounter. This element may require a slightly longer paper trading stage.. The fact, that losses and wins are not necessarily evenly distributed on your trading chart. You may face a string of losses. Although the average loss may be affordable in terms of your trading capital, and the group of losses cannot. It is very important to make sure, that a losing streak doesn't kick you out of the game.
Here are the rules for trading on paper, which allow it to be as close to real as possible and make paper trading an effective learning tool:
- Make your decisions only in real time, not post factum. Looking through schedule and deciding where you can get in and out, you will not do yourself any good. Everything is elementary in hindsight and looks very different., when you're opposite - what Alan Farley calls a hard right edge - end of the live graph, putting you in the dark. Record your entry, when your setup worked, write the output, when the chart reaches your target or stop.
- Follow your trading rules the same way, as if you are trading real money. Any solution like “I will do so, although with real money i will do it wrong” makes trading on paper worthless. If your stop level is reached, trading on paper must be terminated and recorded, even stock immediately jumped back. If your exit order is not reached, do not record the result with little profit – it negates paper trading, which should show if your goals are realistic and if the stops are placed correctly.
- Make trades with the same risk, as if you were trading real money. The decision to trade risky stocks on paper does not make sense, at a time when you are not going to trade them on a real account. Your paper trading tests your trading strategy, not a game.
- Use the same set of tools, which you intend to use in real trading. For example, if your trading system requires Level2, then trading on paper without it, with the thought that in real trading with Level2 your trade will be better, makes no sense. She won't get better, everything will be completely different.
- Consider your ins and outs done, only if there are real prints at the target price. Just see bids or asks, which you want, does not guarantee, that you will receive your executed order at this price.
- Determine the number of shares, available at your price. If you are going to trade in 1.000 шерс, but there is only 100 Shares, then most likely in real trading your order will not be fully executed. See real prints, to determine how many shares there really are.
- Don't use paper trading to plan the amount of money, which are you going to earn. This is not the task of this stage.. This can make you overly impatient and eager to start a real trade before you are ready.. just write the results, to see if your strategy works.
Explore your platform. Manipulate settings, change the number of shares, the price of your order, order type and router type. Switch limit order on market order and vice versa, practice changing quickly change cent. manipulate the settings long enough, to make this process automatic. Learn how to place additional orders.
AND, finally, configure sending orders in this way, to keep your money safe. Do it in the following way.
Set a small number of shares – from 10 to 50. Set a price, far enough from the market price, not to be fulfilled. If the stock is trading for about $20, prepare your buy order by $10 and for sale by $30. Submit orders. look, is there any confirmation. Now cancel the orders and see the confirmation. Make Sure, that all messages, which you got, verified, so as not to waste time reading them later. Make Sure, that pop-up notification windows do not interfere with work. Monitor the accuracy of quotes, especially during the most active periods. Make Sure, that you have a phone number, for quick communication with the broker and with the technical support of the provider, in case of possible problems with the Internet.
Often asked, how long should this stage take. But there is no answer, the same for all. There are traders, who study during the week, and I know a broker, who traded on paper for a whole year. This does not mean, that he is a slow learner. He was just perfecting his trading system., until I was completely satisfied. Although the year, maybe, this is already extreme, and a week or two is also not quite right, which suits most people. The exact time is usually not important, since it will be different for everyone. Paper trading has specific goals, and you must move forward, when these goals are achieved. Keeping all your trading rules, you can show a stable profit? You have seen how your setups work and you are comfortable with them? Are you sure you know the drawdown, which your system can create and can withstand this drawdown? You feel comfortable working with charts and trading platform? If you can answer YES to all of these questions, then trading on paper can last only weeks for you. If you cannot answer for any reason, make in practice one of the most important elements of your psychological transformation – patience. Learning to sit on the sidelines will serve you well.. It will also allow you to gain a greater sense of self-control on your first day..
We mentioned two more cases, when paper trading makes sense.
Testing a new system or improvement of the existing, will obviously make you go back to paper trading. You change something – why risk real money before, how to make sure it works well? Usually, when a trader does it, he already has enough experience in his belt, to know how effective trading on paper is. Just make sure, that you are giving her enough time and your results are already statistically significant. I know a trader, which makes this type of new testing setup without stopping real trading. In the process of real trading, it simultaneously records optimized trades, comparing the results and drawing conclusions about the quality of optimization.
After going through a series of losses, the trader wants to find out the reason for the low performance. These are market conditions, which change this way, that it destroys his trading system? This is a trader, who acts unruly himself? If this is a market, whether it has changed fundamentally or is it a short-term fluke? Or changed main trend? Or is it just temporary narrowing the range without volumes? What is likely to happen next? These types of questions are not easy to answer in the heat of battle.. In this way, digression towards revaluation of things, to regroup and rebuild trust or reconfigure your approach, is a good solution.
If for some reason you switch to paper trading, your main step to ensure success in this, is the definition of goals and the development of steps to achieve it.
