Paper trading is a method of self-study that will help you become successful in trading. It is very popular even in some big companies where the first task they propose to the newbies is to take a notepad and write all the important things down.
You may wonder why do you need a notebook? What advantages does it have? Why use a paper when you have a demo account to try new things on?
In this article, I would like to answer these questions. And I think the best idea will be to present you with a step-by-step tutorial on paper trading.
Practical instructions for paper trading
Stage 1. Note the essential features
The very first thing is to write the basics like what financial instrument you wish to trade. This will keep you focused on a limited selection of assets. I recommend choosing just a few, maybe 3 or 5. What else should you include in the list in step 1?
- the financial instrument you choose to trade;
- the total amount in your account at the beginning of the trading;
- the strategies you would like to imply.
Select strategies the same way you have chosen the asset. Avoid the temptation to try all the strategies you know. Limit the number of them to 3 different ones.
Stage 2. Define your limits
Your limits are spread between failure and success. That is, you should determine the sum of money you are prepared to lose as well as the amount you wish to earn.
As for the first one, do not consider 100% as a possible loss. It is equal to bankruptcy and this is not the attitude that can bring you profit in the future. So even if you start small and are not afraid of losing the initial amount, allow no more than 5-10% loss of your original funds.
On the other end of your limits, there is a success. It is wise to set a target to help you stay focused. According to some capital management strategies, the amount you aim at shall be minimum twice the limit you set for a loss.
Stage 3. Begin taking notes
Open the platform with the asset of your choice and analyse the chart. Try different timeframes to spot the right moment to enter the trade. When you got a signal, note that you have opened a transaction.
Once you note opening a position, you may keep monitoring this particular instrument. It might be a good idea as your analysis may differ before and after making a transaction. There is a psychological change in your point of view. Although this change is not that strong in paper trading, you may still analyse the elements that will make your hypothesis true or false.
Stage 4. Performance summary
Sum up the results systematically, do not wait with calculations until you reach the limits you set on the second stage. Write down how you perform every 30 minutes or every hour, whatever timeframe suits you best. Just keep it writing.
Taking a pause to sum up the results will help you to control your capital. You will see how much you earn or lose and what is left to meet the limits. You will also have a possibility to adjust the strategies that seem not to work as good as expected.
Stage 5. Final conclusions
At the end of the session, analyse your doings. Notes from the third step will be very helpful at this stage. They will remind you of the most important moments of your trading.
Draw some conclusions after every paper session. Analyse what brings a profit and what does not serve. For instance, you may notice that every Tuesday you lose money in the morning hours with a certain strategy. Change it. Create new solutions.
Demo account and paper trading
Some will argue that a practice account is such an excellent tool, that paper trading is a waste of time. I agree with the first part. A practice account is a wonderful option for trying new ideas, for finding your trading style. There is no real money involved so you can use it often.
But paper trading is something else. It is an accompanying training technique that gives you a fresh perspective. Not all traders are content with using a practice account. Paper trading is a solution for them. It is also helpful in the preparation phase. For some, it is just more transparent and easy to apply.
Whether you are a demo account fan or not, paper trading may be a procedure worth trying.
Advantages of paper trading
The main reason why paper trading is worth trying is that it actually teaches you to think like a true trader.
Go back and review stage number 3. Understanding of the market, of the circumstances of opening a position as well as holding back, are crucial for successful trading. You need to analyse what works and what does not, draw conclusions and learn the lesson. A good trader is not the one who does not make mistakes, but the one who makes a good out of them.
So take a notebook and start taking some notes now.
Wish you profitable trades!