The Importance of Paper Trading

Paper trading is a crucial step in becoming a successful options trader. Besides familiarizing yourself with a platform you feel comfortable with and testing different strategies, you will get a small taste of how emotional trading can be. It will also train you to accept opportunity lost, because any gain in your paper trading account will technically be just that. You’ll love paper trading when a trade goes against you, thanking God that you aren’t using real money and hate paper trading when a trade goes your way, cursing yourself for not using real money. The first time my account went up from a successful paper trade, I tried to fund my account with $10,000 the same day. Fortunately, a transfer from the bank takes a few days to clear, so it gave me time to breathe, think and reconsider. Slow down, the stock market isn’t going anywhere.

Most trading platforms have tutorial sections. Utilize these to familiarize yourself with basic trading, even before you get into options. You’ll find that something as simple as just buying or selling a stock can be tricky. There is a difference between Market orders and Limit orders. Your order is not guaranteed to get filled and you want to learn why, before using real money. The market moves very quick and you want to feel confident when entering and exiting a trade.

I started paper trading on actual paper because the platforms were so intimidating to me. I only used them to look at the options chain and recorded all of my trades by hand. There are a lot of “what ifs” in options trading. If you’re not tech-savvy, just pick a stock and look at the options chain. Hand write an order down and ask yourself what will happen if the stock closes above or below your strike price. Here is an exact paper trade I picked from my notebook:
1/4/16 Buy GPRO @$18.65
Sell to open 20 GPRO 1/8/16 $20 C @ $0.26   premium $520
GPRO closed at $16.19 on 1/8/16

Read Covered Calls in the Educational section, study the scenarios and as an exercise, I’ll let you figure out if I was happy with this trade. Also, ask yourself what could’ve happened that following Monday to put me in a better position.

Note: I remember one of the first questions I asked myself was why the premiums were different for different stocks, and filled up notebooks, recording how they changed daily. This is a very important concept to understand and urge you to review the Educational section of Mainstbeatswallst. Of course, a high premium is very attractive, but to quote Jerry Seinfeld, “Like the lure of the Siren’s song. Never what it seems to be, but who among us can resist.” High premiums are high for a reason and will touch on the dangers more down the road. For now, learn your platform and educate yourself on the fundamentals of trading.

 

The Grasshopper