What is Paper Trading?Paper trading is simply a process of taking hypothetical trades as if you were actually trading real money. The only difference is that you are not putting your money at risk. With paper trading, you only write the buy and sell orders down on paper and track how well you would have actually done if your were trading for real.
Think of paper trading as a simulator. It is used as a training tool, just like pilots learn to fly on a simulator before they actually fly a real plane…with passengers at risk. To begin paper trading, you should already have a detailed trading plan put together that outlines your entire trading strategy. Then, you will write down your entry point if you place a buy order and when the market hits that price, you should consider that a filled order.
From that point, you should have your stop loss order in the market and a good idea where or how you want to exit the market. These orders should also be written down to keep yourself honest. When your exit is hit, you will record the profit or loss obtained on the trade. After a series of trades, you will begin to see how well you might have done if you were actually placing real trades with a commodity broker.
CommodityBroker.com offers a free paper trading service that you might want to check into. They offer two types of paper trading programs. The first paper trading program allows you to work with a commodity broker where you will place orders directly with the broker and he or she will track your trades. Here, you get the benefit and experience of dealing directly with a broker.
The second program allows you to setup an online paper trading simulation, where you place trades directly in an online account. The trades don’t actually hit the trading floor, but you get a very realistic experience of online futures trading without the risk. The simulator tracks your trades and provides you with a profit and loss statement. Both of these services are free and I feel it is a much more beneficial and realistic experience than simply writing your trades down on paper.
Pros and Cons of Paper TradingThere is a difference of opinion among many experienced traders on whether paper trading is useful or not. Some will say that it is not completely realistic since you don’t have any money at risk. And once your money is at risk it is a different ball game. Emotions cloud judgment, as fear and greed become your enemies. These points are valid, but the benefits of paper trading outweigh these issues.
Paper trading offers you the opportunity to get familiar with trading and to see if you are on the right track. It also allows you the opportunity to make adjustments to your trading plan before you put money at risk. Many traders often go back to paper trading when they are struggling as a way to get back on track. Overall, it is not the complete experience, but it is an excellent training tool and almost a necessity before you put your money at risk trading commodities.