Friday, May 19, 2006

Education: Paper trading as a learning tool

The best way to learn is by doing, but unfortunately to get into the investment game doing can be really expensive. But it doesn’t have to be…

If you are starting to get a hang the fundamentals of investing or trading, you may want to put them to the test with paper trading.  There are some websites that give you the opportunity to trade virtual accounts. This can be an amazing resource for helping you realize what your strengths and weaknesses are—something that is very helpful in becoming profitable.

There are some important caveats though:
  • Remember that paper trading doesn’t have the same emotional weight as real money trading. You need to develop the cast-iron stomach to treat your real money with the same detachment as your paper trades.

  • Keep a detailed journal of why you entered a trade. If it goes wrong, think of why.  This is how you truly learn.

  • Trade as realistically as possible in your paper trading so that you can predict the outcome of your system later. An accurate representation of what you are going to do with real money can help you shake out some of the kinks without losing precious, precious change.

  • Use risk management now (getting out of losing positions early) so that it becomes habit when you have real money on the line.  This is the best way to develop a nuanced risk management strategy.

There are several free simulators, but the two that I have found most useful are at Investopedia and the Virtual Stock Exchange

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