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Paper Trading – A Trader’s Best Friend

Paper Trading – A Trader’s Best Friend

Martin's picture
Mar 07, 2015

I think for beginners and even some experienced traders ‘paper trading’ is one of the most underrated/underused tools in the trader’s armoury.

‘Paper Trading’ is when you test your trading and strategy without actually placing any real money on it, recording data as if you had put money on it. This is so essential to a trader because you can test an idea, or how good you are without losing any money.

So why is this concept so underused? There are a few reasons I can think of:

  • Greed – a lot of traders want to win big straight away!
  • Thinking short term/Impatience – If a trader has a ‘good’ idea they want to implement it right away because the trader believes in the idea they see no point in testing.
  • Time – some traders don’t have the time to do this and not make money, how can they justify spending all weekend off work trading to make £0 profit at the end of it.
  • Arrogance – this is a good idea why should I test it? I know it will work!

Whatever the reason, it is a BIG mistake not to paper trade. However good a system seems, until it is tested it is utterly worthless. To give a business example of this just watch an episode of Dragon’s Den. Walk into that room with a good idea and the ‘Dragons’ will perk up, when you tell them you have not tested the product at all their heads will drop and they will declare themselves out instantly.

Most trading software out there now has a ‘practice mode’. Use it! It’s a great feature that could save you a lot of money. Track your results and keep a profit and loss sheet in Microsoft Excel. I have put an example of my spreadsheet in the files section on the Facebook page so use and adapt that if you do not know how to use Excel.

If you really cannot fathom the idea of paper trading then I think you should take a good hard look at your discipline levels, if you cannot bare the thought of seeing a good bet win without any money on then you aren’t in the right mindset for trading anyway.

The only alternative to paper trading is putting a tiny bankroll aside, one that will literally make no difference to your life if you lose it, and use that. As this is not so different from paper trading and it can be good to use some real money just so that you know you are taking it seriously. That is the only real pitfall with paper trading; it is very easy to trade without real money on a bet and make the right decisions. This can be a lot harder when your hard earned is on the line! The answer to this problem is that you need to make sure, once you have tested thoroughly and decided to go for it; you still make those same decisions and don’t bottle it when your money is down.

So how long should you test before putting your money down and using your real bankroll? Most traders I have spoken too agree that at least three months is required to determine that a system is working. All beginners and new traders to the site should paper trade for three months to see if they are profitable before putting their money down, I even think this should be done when following other people’s tips and advice, find out if they can make you money before you throw your hard earned cash at a bet. This may seem a defensive approach to trading but most traders lose for a while before becoming profitable professionals, so why not save some money whilst going through that process?!


Andy's picture

Can you give an estimate on the number of trades you would recommend to test a strategy by paper trading or using small stakes? Obviously using 3-6 months as guide could have a huge variance in number of trades depending on trading frequency.
Martin's picture

I would want at least 200-250, at least!

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