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Paper Trading Profits

Paper trading will provide you with the best education you can get at the best price on the market, free! There are numerous benefits to paper trading with zero cost or risk to you because it is a simulated replica of a brokerage account that you can practice with before you trade with money at stake. Paper trading is an essential element to every successful trade plan at every level of an investor’s depth of industry knowledge because it simultaneously allows you to reduce risk and perfect your skills simultaneously.

Should I Paper Trade?

Paper trading is the act of using a simulated account to practice trading. New traders ask me all the time, “should I paper trade?” They seem almost embarrassed to ask because the goal of paper trading is to practice for the real deal, but they are certain that they are already at a proficient level of knowledge. So, this translates into feelings of inadequacy. My unequivocal answer to any trader who asks about paper trading, regardless of their expertise, is always YES! Paper trading will yield rewards through every stage of the trading cycle. This report is an outline of how paper trading a virtual account will ironically give you actual profits.

Reduce Risk

If Trading is Risky, Not Paper Trading is Riskier! Trading is the practice of accepting various levels of risk in exchange for quantifiable returns. Practice makes perfect. We have all heard this sentiment, but it has never been truer than trading in the markets. Paper trading is an organized way to test your methodologies to standardize your processes. Nobody has a crystal ball. It is impossible to know what the markets will do. The best way to neutralize the unknown is to have an actionable contingency plan. A paper trading account is a blueprint of escape routes in case of a fire. If schools have fire drills, then so should you!

Try New Trades to Improve Your Technique

Try new strategies in a safe trading environment so that you can grow your skillset. Regardless of how much logic, how many seminars, and how much online “propaganda” I read to the contrary, I was pretty sure selling naked options wasn’t for me. It even sounds terrible! Futures trading? Same! Experience paper trading allowed me to try what I had deemed as unacceptable risks in a safe environment. Now, thanks to that experience, I use those strategies as the foundation of my trading plan.

Increase Your Sample Size

If you flip a coin repeatedly to play heads or tails, you may get multiple instances of heads in a row. It is easy to give up on a strategy because your result sample size is not large enough to conduct an objective study. Profits are a math equation with predicable outcomes related to return on capital, probability of profit, and standard error. This methodology’s central theme is that the more occurrences you have, the more opportunities you have for those probabilities to work out in your favor. The more success you have, the more confidence you will build, and it is just a chain reaction that will create momentum that reflects positively in you the results of your actual trading account.

If at First, You Don’t Succeed

You get nine lives. Take them all! Have you ever seen the show Fear Factor before? The show makes people do things that people are afraid of doing (hence the name) for money. The show’s structure is predictable. Individuals or teams of contenders compete in jumping from skyscrapers, eating bugs, and doing bazaar things that nobody would volunteer to do under normal circumstances. Typically, the first contestant who tries fails. However, the second person who got the advantage of watching the first person’s failures has several advantages and is much more likely to succeed. There are tons of reasons why. They can learn from the previous opponent’s mistakes, learn about unexpected booby traps, visualize themselves doing the task ahead of time, and above all, this is a stalling mechanism that allows them to formulate a more cohesive plan of action. Paper trading is just a different version of Fear Factor. In this environment, view paper trading as contestant number one and delight in your live account being contestant number two. From now on, when you are trading, and you wish you were doing just about anything else, remember it’s better than being on Fear Factor!

Practice Makes Perfect

Malcolm Gladwell wrote a book called Outliers. In his book, he states that achieving true expertise in any discipline is simply a matter of practicing the skill to the tune of ten years or 10,000 hours. The 10,000-hour rule has been debated, but the idea makes sense to me, especially in making money trading the markets. I would argue that all traders at every level of experience should always paper trade along with their live accounts. Even if Gladwell is wrong about the rule, it is worth trying in your trading accounts. After all, the experience is priceless, and you have nothing to lose!

Double Check Your Checklist

Paper trading backs up backtesting. Although paper trading and backtesting are similar concepts, paper trading is a method of backtesting in real-time.  Ironically, traders who would not blink an eye about paying hundreds of dollars for backtesting software somehow feel demasculinized about paper trading when the opposite should be the case.

Trade execution is a skill category in and of itself. Paper trading allows you to practice trade execution; backtesting does not. The logic is that a backtesting software is oversimplified, and paper-trading sends a message that the trader needs to practice executing the tested strategy? Would you execute a strategy without some form of practice? The answer is YES, but only in a paper trading account!

It is always better to look forwards, not backward. Paper trading is looking to the future; backtesting is looking to the past. Backtesting is best used in a paper trading format because when you select strategies to backtest alone, you already know what the market did. You are likely to rig the strategies to include the ones that performed the best without meaning to. Therefore, backtesting in a paper trading account is best because paper trading ensures you are enacting the strategy into the future without knowledge of the future.

In paper trading, you learn to balance a portfolio, backtesting you learn one stock at a time because cost-efficient back testers often allow you to test only one strategy at a time so that the work can be cumbersome and time-consuming. For example, the Think or Swim platform is dreadful to backtest with because you will spend more time scrutinizing the data than it would take to enter the trade.  To get the best use out of your paper trading account, enter an entire portfolio the same way you would trade an account in real life. Practicing this skill cannot be overstated. One of the most important skills that every trader must have is to hedge a portfolio to protect your returns.

Paper trade for an in-depth look at the facts. Most back testers do not show you the entire picture unless you make the extra effort to dive into the numbers. With results so easy to retrieve, it is exceedingly difficult to see a mediocre strategy and wade through the boring numbers to find out exactly what happened and when. This issue is exasperated by the difference between the probability of touch (POT) versus the probability of profit at expiration (POP). Statistically speaking, POT is twice as high as POP. You probably had a loss at some time in the trade, but if you held onto the option, you made money by the end of the trade. Ultimately traders backtest a strategy without delving through the analytics, and when they place the trade in real life, they close the trade the moment they lose money so that backtesting backfires for them.

Realistic Trading Environment

Paper trading is the Swiss Army Knife of trading because it compiles every operating tool you have at your disposal into a live-action simulator to see how robust your selected strategy truly is. Each tool is made that much better when they combine.

For example, chart analysis is always included in a paper trading account. How many hours have you spent studying technical charts? Several paper trading accounts do not give you access to the charts you regularly use, so double-check to make sure that the charts you need are included in the paper trade account beforehand. You could do a visual skim of a chart. When you paper trade a technical chart pattern, it is easier to pay attention to cause and effect, which is especially valuable in a live trading account when the pressure is on. Spend the time to execute the plan properly by allotting a specific time to perfecting this art.

You will also have access to identical fundamental analysis tools that will enable you to review corporate financial documents to decide if you should invest. Earnings events, initial public offerings, mergers, and acquisitions are examples of potential events that allow you to create trades based on fundamental studies. For example, Black Friday is the biggest shopping day of the year for online and brick-and-mortar companies alike. Therefore, it is not surprising that there is a direct, measurable positive correlation between Amazon and Walmart’s Q4 earnings and Christmas. Likewise, Valentine’s day should be renamed chocolate day! Hershey’s corporation gets a dependable spike in revenue Q1. Event-driven trades are executed in more volatile circumstances. Paper trading these events will focus your expectations accordingly.

There’s a Reason Platforms Invest in Paper Trading

Most trading platforms do not include paper money because the programming requirements are expensive, and they must hire programmers, pay for the data streaming, have customer support available for clients. These services are not just costly; they are also extremely time-consuming. To top it all off, since paper trading is 100 percent virtual, they get zero percent paid for it. After all, they don’t get commissions on fake trades.  TOS (Think or Swim) is the most commonly used trading platform across the industry. The TOS software has both live and paper money. These two platforms are nearly identical. I have paper traded on nearly every platform in the available market, and I can confidently say that TOS’ paper trade platform is as succinct as it is robust. The only requirement to use this product is that you must open a real account. I have included a list of the most popular brokerage houses and separated them into two categories, those with and without paper trading accounts available.

FAQ

  • Can I trade all the symbols in the paper trade account that I can in the live account? Yes.
  • Will I have access to all the same charts on both platforms? Online TOS officially claims they duplicated most charts. In my ten years of trading TOS, I haven’t ever been denied an indicator.
  • Will I have access to the back tester? Yes. It is the same tedious software in both versions of the platform.
  • Will I have access to the probability cone? Yes.
  • And you will have access to the trade analyzer? Yes.
  • Are the trading prices accurate? No. You will indeed get better fill prices paper trading than in real life. However, after ten years of day trading for myself, I can confidently say that the prices I get filled with on the paper trading platform are nearly identical to the execution I get on the real platform. Have you heard of Priceline? Ticker symbol PCLN. Priceline no longer trades on the market, but the bid/ask spread at least $100 difference, if you recall. (I don’t recommend trading like this. Thanks to penny increment options, you should never trade an option unless the bid/ask spread is a penny wide!) When I was a day trading Priceline at the market open, which presents a unique problem since the paper trading TOS platform has a 15-minute delay unless you fund your real account, call customer service, and specifically request real-time data. Despite these limitations, I was still impressed with the results. When you buy or sell a security, as always, you can expect a mid and natural price sliding scale so you can toggle your acceptable prices. I never had an issue with a difference between the paper and live quote. Disclaimer! I always double-check the numbers for accuracy to make sure all my trading is as precise as possible. I approach every trade the same way regardless if it is real money or not.
  • Will I still get assigned? Yes and no. The process of getting assigned in a paper trading account is different from the real thing. If your option goes in-the-money before expiration, you will not be assigned in a simulated account. If you let the option expire in-the-money, you will be assigned in a simulated trading account. So, as you can see, the assignment process is different in a paper versus a live trading account.

Conclusion

As those of us who regularly trade know, there is no substitution for the real thing. Murphy’s law is the concept that everything that can go wrong in real life will go wrong. So, of all the things you could practice making money should be at the top of the list. Paper trading combines the essential mechanics necessary to make prudent financial decisions in an environment that is uncertain. Dedicating the time to practice these essential concepts will fast forward your trading success.

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