SteadyOptions is an options trading forum where you can find solutions from top options traders. Join Us!

We’ve all been there… researching options strategies and unable to find the answers we’re looking for. SteadyOptions has your solution.

Pros and Cons of Paper Trading


My first recommendation to all new SteadyOptions members is to start with paper trading, then start small and increase your allocation as you gain more experience and confidence. Over the years, we had a lot of discussions related to the benefits of paper trading, and this article will discuss some of the pros and cons.

Investopedia defines paper trading as "a simulated trade that allows an investor to practice buying and selling without risking real money. While learning, a paper trader records all trades by hand to keep track of hypothetical trading positions, portfolios, and profits or losses. Today, most practice trading involves the use of an electronic stock market simulator, which looks and feels like an actual trading platform. Most brokers allow to open a paper (simulated) account where all trades can be simulated. It also can be done using an options trading software such as ONE, or simply by writing down all trades by hand.

Here is the summary of the pros and the cons of paper from few different sources.
 

The Pros

  • No Risk: It costs nothing, and you can't lose money with bad decisions or poor timing. 
     
  • No Stress, no emotions of greed and fear. The trader can focus fully on the process, not the emotions.
     
  • Practice: The trader gains experience in every element of the trading process, from pre-market preparation to final profit or loss taking. 
     
  • Confidence: Making a series of complex decisions that gets rewarded with hypothetical profits goes a long way in building the novice's confidence so that they can do the same thing when real money is at stake.
     
  • Statistics: Paper trading for several weeks up to a month builds useful statistics about the new strategy and market approach. 
     

The Cons

  • Slippage and Commissions: Real money traders deal with all sorts of hidden costs from slippage and commissions. Usually it's not realistic to get filled at the mid, so the results of paper trading might be skewed.
     
  • Emotional Reality: Paper trading doesn't address or evoke real-world emotions produced by actual profits or losses. Controlling emotions in the market is hard. If you only focus on the money, you have the wrong mindset.” The game only becomes real when you have "skin in the game"
     
  • Formfitting: Paper traders pick out ideal entries and exits, missing the minefield of obstacles generated by the modern computer-driven environment. 
     

What Our Members Say

Here are some selected comments from our members, taken directly from the forum:

  • Many books and people I've read suggest paper trading for at least 6 months before putting real money on this business also, read as much as you can because knowledge is your main advantage in this game.
     
  • I have found real trading sharpens the mind; the learning happens a lot faster with real money. Also, with trading real money, you get a much better appreciation with how fills work.  Paper trading fills are nothing like they are in real life.
     
  • Paper trading is really good to get to know and more deeply understand the strategy but it doesn't fully simulate all (especially psychological) aspects of live trading, net net I see a valuable place for both.
     
  • A key element is effective learning/maximizing the pace of learning. In the context of maximizing learning paper trading has a clear place in developing the 'muscle memory' of the trade execution. In a paper context you can focus on entering, monitoring and exiting in a safe space (without the psychological highs and lows).
     
  • I am not interested in devoting the time to paper trade and can't sustain ongoing losses plus fees.
     
  • The point with paper trading is to understand the strategies, see how a trade evolves day by day, see how the adjustments impact the trades etc... IMO, focusing on paper trade fills vs live fills is missing the point of it.

My Take

The goal of paper trading is not to see if the trade is profitable or not. It's mostly to "feel" the strategy and follow the dynamics. When trading a new strategy, most traders will make mistakes, no matter how experienced they are. Those mistakes might include things like forgetting closing the trade before earnings, missing the adjustment or the closing notification etc. When you jump with real money right away, those mistakes might become very expensive.

I can definitely see and understand both sides of the argument, but just to clarify: my recommendation applies to ALL members, novices and experienced. The reason is simple: for most traders those strategies will be fairly new, even if they have years of trading experience. It's like changing specialty in medicine - even if you are a very experienced doctor, a new specialty always presents new challenges.


Here is an example from just few weeks ago. We had a new member who said he doesn't need paper trading because he has 10+ years of experience. He jumped into one of the straddles on his second day. He did not read the strategy overview that mentions that all earnings trade are closed before earnings and relied on the trade notification to close it. He did not read the discussion topic, and also was not aware that he needed to follow the trade topic to get the closing notification. It didn't end well for him - he held the trade through earnings, the stock didn't move and the straddle lost around 60%.

There are many moving parts in those strategies, and even experienced traders need some time to learn them. Paper trading simply prevents you to lose money if you make a mistake (and most traders will).

In any case, if you decide not to do paper trading, I would strong recommend at least to start small, and the most important, please get familiar with our strategies and the way the forum works, before jumping to live trading.

 

Summary

This is taken from  one of the options trading mentoring programs website:

Plan on at least six to twelve months of paper trading and live trading to get to break even. Once you are not losing money, you can slowly start scaling your trading size up. Your doctor, attorney or pilot all started by hitting the books and then getting instruction from a current and qualified professional to teach them their trade. It is no different with option trading. It's a complicated skill set that needs a good amount of understanding before you start trading live.

I guess I'm not the only one advocating this approach. And the simple truth is that in any profession you are required to spend countless hours practicing before allowed to do the "real thing". Pilots spend hundreds of hours on simulators before flying a real plane. Why people expect it to be different in trading?


The bottom line is: while paper trading has its limitations, both trading and emotional, I still recommend doing it, and many traders come to realize its benefits.

 

What Is SteadyOptions?

Full Trading Plan

Complete Portfolio Approach

Diversified Options Strategies

Exclusive Community Forum

Steady And Consistent Gains

High Quality Education

Risk Management, Portfolio Size

Performance based on real fills

Subscribe

Non-directional Options Strategies

10-15 trade Ideas Per Month

Targets 5-7% Monthly Net Return

Visit our Education Center

Recent Articles

Articles

  • Options Strategies for Small Accounts

    Ask a handful of traders what they deem a “small account” to be and you’ll get probably get a few different answers. For the sake of this article, we classify a small account as having less than $5,000. There’s a number of obstacles you run into trading a small account, like the options in certain underlyings being too expensive for you to trade, as one example.

     

    By Pat Crawley,

    • 0 comments
    • 88 views
  • 7 Things I Wish I Knew When I Started Trading

    Options Trading can be very exciting and rewarding. But you should not be trading options before learning at least some basic facts about options. Options are very different from stocks.  This article presents 7 basic options trading facts that every options trader should know. Don't start trading of you don't understand them.

    By Pat Crawley,

    • 0 comments
    • 206 views
  • How LEAPS Differ From Short-Term Options

    LEAPS stands for Long-Term Equity Anticipation Security. Which is just a long-dated option, typically referring to those with expirations more than a year out. There’s no technical difference between LEAPS and shorter-term options other than the expiration date. They’re traded on the same exchanges and have the same rules surrounding margin and whatnot.

    By Pat Crawley,

    • 0 comments
    • 262 views
  • What Is An Implied Volatility Crush

    IV (Implied Volatility) crush when the implied volatility of an option takes a nosedive shortly after the conclusion of a catalyst like an earnings report or corporate action. The uncertainty around a company’s earnings report (or other significant catalyst) drives option prices up in the lead-up to the announcement, and down following the announcement, once the uncertainty is gone.

    By Pat Crawley,

    • 0 comments
    • 210 views
  • Top features of NinjaSpread

    There are two main goals of the scanner: show you hidden opportunities and save a lot of time with automated scanning. Let’s see what the top features are and how NinjaSpread can help your trading life.

    By Gery,

    • 0 comments
    • 763 views
  • Wide, flat SPX Diagonal Spread

    I love to trade SPX diagonals, especially when IV skew is higher than usual and I get a wider range of break evens. I know that time spread break evens are “theoretical” because they are dependent on the IV skew of the front and back month’s IV that changes all the time.

    By Gery,

    • 0 comments
    • 708 views
  • How Investment Trading Can Help Grow Your Business

    When it comes to growing a business, there are many different options out there. For example, you could try traditional marketing methods or explore new and innovative ways of expanding your company. One such way is through investment trading.

    By Kim,

    • 0 comments
    • 1,208 views
  • 3 Tips To Use When Getting Into Asset Management

    Asset management has proven to be a fruitful career for more than a few professionals in recent decades, explaining why it’s attractive to finance professionals and students. Not only is it a financially rewarding career, but it’s one of the more interesting ones to pick.

    By Kim,

    • 0 comments
    • 660 views
  • Extrinsic Value vs. Intrinsic Value

    Options are distinctly different from stocks in that they’re derivatives of another asset. The entire value of an option contract depends on factors outside of itself--it’s all based on the price of its underlying asset. Options are highly mathematical in nature, and in some ways, we can quantify the precise value of an option using a model like Black-Scholes.

     

    By Pat Crawley,

    • 0 comments
    • 771 views
  • Comparing Iron Condor and Iron Butterfly

    Both the Iron Condor and Iron Butterfly are short-volatility option spreads. You'd use them to profit from situations where option prices imply a larger price move than your view of the market. These spreads are how traders profit from stocks that go nowhere.

     

    By Pat Crawley,

    • 0 comments
    • 795 views

  Report Article

We want to hear from you!


There are no comments to display.



Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account. It's easy and free!


Register a new account

Sign in

Already have an account? Sign in here.


Sign In Now

Options Trading Blogs Expertido