Paper Trading (Stock Simulations) & Trading Psychology

Oct 11, 2007 -

Walk into a room of stock traders and ask them if they’ve paper traded before. Most, if not all, will say they’ve paper traded/used stock simulations at one time or another. When I was beginning my trading career, I didn’t put my money in a discount brokerage and trade right away. I started off papering trading- stock trading with pretend money.

Although, paper trading/ trading simulations can be useful at times, most simulations don’t accurately reflect true trading conditions. There are several simulations that start you off with a million dollars in your portfolio. If you are a beginning trader, it’s possible, but highly unlikely that you will be beginning your career or let alone hobby off with a million dollars. But, more importantly, paper trading rarely allows to you experience the emotional roller coaster you may be on when you trade with your own money.

Here you are trading stocks with a million dollars of nobody’s money (pretend money). Would you care if you lost it all? Probably not. If you lose it all you could always start a new account and load it up with another million. No big deal, right? I digress, under this approach, not much thought goes into selecting your trades, if any at all. This means you aren’t being serious about trading, which under an actual account, can lose you money. Having said this, it’s possible that you act very careful with your allotted million, but regardless there’s a big difference between trading with fake money and trading with real money. Let me tell you why.

When you start to trade with your own money, suddenly a $1000 loss makes your heart drop. Conversely that $3400 gain can make you jump for joy. In a simulation account, a similar result might prompt you to say “Oh great I gained $3400, but I can’t spend it so who cares?” The emotional factor or trading psychology is missing in stock trading simulations.

When I first decided that I wanted to get in on this stock market action, I did very little simulation. At most I spent two months with simulations/paper trading. Like many motivated and enthusiastic beginners, for the first couple weeks, I was very dedicated to the simulation/ paper trading. I tried to learn from my mistakes and develop strategies to avoid big losses or secure big gain. I imagined that virtual million as being my own money. But, I wanted to “feel the million in my hands”. I couldn’t get myself to really give a damn as to what my stocks were doing.

After two months, I took the plunge and jumped right into trading with my own money. I figured it’s been long enough, messing around with play money. If I am going to make mistakes and learn from them, I need them to truly start making an impact on me. At first, I was very protective of my cash and had no idea as to how to keep composed or remain calm and collected. When my stock dropped even one percent, my heart would drop and I would freak out. I thought if my stock dropped more than five percent, I would have a heart attack. I am sure that you can all understand that when your emotions start to play a role in anything, your logical judgment becomes clouded. People who seem logically and sound minded suddenly lose it and go berserk. What good does a trading strategy do if you can’t execute it because your mind is going bonkers? Keep a cool, collected, and sounded head.


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