The Paper Trading Trap

Paper trading is a solid tool, but it must be used properly. Yes, it is highly suggested that you hone your skills on paper before putting actual capital at risk. That being said, paper trading can also be a negative to a beginning trader.

The short explanation is that paper trading can create a false sense of confidence if the trader spends too much time making “realized” profits.

A $20k gain in a paper account will bring a level of emotion in a real account. Unfortunately, the trader in the paper account will never actually know what a 20k realized profits truly feels like.

It’s only when you have skin in the game, that you truly understand what risk and managing a position truly means.

Before a new trader even begins paper trading, they should take the time to actually learn about the financial markets; even at their most basic level.

Too many newbies just jump right in and deposit money into an account and start pressing buttons. They’ve watched a few YouTube videos and assume they’ve got it down. They clearly have no idea what they’re doing and quickly become yet another casualty of the markets.

We highly advise to take your time and actually learn about what you’re getting yourself into; this should begin way before paper trading.

There is a right way and a wrong way to paper trade. To begin with, put a time limit on paper trading a new strategy.

More importantly, it’s advisable NOT to practice with large share size. Why? You’re not on a paper account to see how much simulated money you could earn, you’re on a paper account to see if a particular strategy will work and can be scaled. That $20-50-100K gain in a simulated account will do more psychological harm than it does good. Stick with small size on the sim.

Time Test. For example, you can do a 30-day limit, testing out your new strategy or use a trade count option. This could be a 20-trade test, to see how the strategy unfolds. Once you’ve completed your pre-determined testing option, gather your data and make a decision on whether it could be positively scaled. If you can successfully scale the strategy over time, then it’s time to put real money to work; don’t get stuck in the paper trading account.

The next set of testing will be once real money is put to risk.

Think process over profits. Don’t worry about making money at this point, focus on consistency. Successful trading is chess, not checkers.

Stay diligent and laser focused on the one strategy you practiced in your paper account, as this will build your confidence. In turn, this confidence gets built from consistency; which translates into increased share size as time goes on.

More risk (increased shares size) in a consistently positive strategy = More Profit.

Process over Profits.

Repeat this process with each new strategy.

This is the watered-down version of how you properly build a playbook of tested strategies that you’re confident to utilize when the market presents particular opportunities.

Paper trading (simulated trading) is a great tool to use, but it’s important to use it strategically; otherwise, you’ll do more harm than good.

Avoid the paper trading trap and use it as a tool, not a sense of false reality.

About The Street Trading

Consistently Profitable.

That's The Goal.

Start with a crystal-clear vision of where you’re headed, then effectively lay the foundation to reach that goal through a systematic process.

That's The Street Trading.

We provide a straight-forward, no-nonsense results-driven trading education, that cuts through the noise to teach new and existing traders on how the stock market truly operates.

Our attention is focused on building actionable knowledge about the markets from the ground up. We construct a foundation of the fundamentals behind consistently profitable trading that you can build a career on. Take the guess work out of trading and ultimately understand what moves the market to finally flow with the Street and Trade with Clarity.

Day Trading | Swing Trading | Position Trading - It all comes down to managing risk and market psychology.

If you’re interested in learning more about what we have to offer you as a trader, come check us out at www.thestreettrading.com

We look forward to joining you on your trading journey!