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Investing and Flying are similar, in many ways. Many new traders doubt if Paper Trading is still relevant? does it do any good at all. They claim that it is a different “feel” when your actual hard earned money is at risk. “Your emotions are your biggest baggage when it comes to trading and investing and so you need to go through the “real-pain or gain” to know “how it feels like” to be a trader”… There’s no denying on “feeling part”; albeit, emotions is just one aspect and it is not very important while you are beginning to learn trading. It’s importance, however, grows over time. So why should you pay attention to paper trading? Why is it still relevant and will continue to be relevant? I trade on paper money even now…why? Let’s categories the reasons into four broad categories: To Know The Trading Platform If you think education is expensive, try ignorance. – Derek Bok When you want to drive a car, you need to understand your car’s operations. You need to know how to start, stop, drive, turn, reverse, park etc., and the list goes on and on. Similarly, in order to execute your trades, you need a trading platform which is usually provided for free by your broker who opens your account and allows you to trade. And guess what, you might have wonderful ideas, trading systems and strategies, but you can only execute those if you understand the trading platform. So what are some of things you need to learn before you could place your first REAL-MONEY trade? You need to understand your account information which includes deposits, withdrawals, current balances and so on. You need to learn how to analyze, open, monitor and close positions for your desired trading strategy and system. Trade identification is one of the first areas you will have to spend time on so knowing how to find, filter and identify trades on your trading platform will be extremely useful. And if you are like most traders, you would want to watch market action and create watchlists, stock filters , etc. for keeping an eye on potential future opportunities. This is just the beginning. As you can see, you don’t wanna experiment all this with real-money. By Paper trading or simulating real-trading environment on a virtual trading account, a newbie trader can avoid painful mistakes that are often triggered due to trading platform ignorance. To Understand Options Better Options are different. Different from stocks, forex and other financial instruments that you might’ve been familiar with. In order to avoid single biggest mistake that new traders commit when they start trading options, I suggest that you may want to read TOP 10 things about options. This will provide you with a primer on what is an option, call option, put option, option buying, option selling and some other characteristics of options such as expiration date etc. Trading options usually involves more steps then simply buying and selling shares. The option price also changes differently to different market conditions. Paper trading first will help you understand how options are different from other instruments. To Manage Yourself Better Prove you can follow the process first, commit capital later. Just like any other other business, Trading business also involves a process. And process is best summarized via your, lets call it, standard operating procedure (SOP) that lists who you will find, filter, enter, manage and exit a trade. Before you commit to real money capital, you need to show, prove to yourself that you can actually follow your own trading systems and strategies. Notice, I didn’t say Profit & Loss; for a new trader learning and mastering the whole process is more important. Do you do proper preparations? do you have patience, persistence and perseverance to follow through your complete trade’s process? Paper trading thus becomes an invaluable tool so you could check your discipline and adherence to your trading plans. The more you practice your trading process on paper money, the more painful mistakes you will avoid in future. That leads me to emotional aspect of the trading process. There are two very powerful human emotions that can affect the outcome of your trading results massively. Fear and Greed. “Trading without emotions requires 3 things. Practice. Practice. Practice.” Let’s go through a recent example: US Markets have been running a wild rally for a long time. Going up and up and turning into a parabolic rally in Dec’17 to Jan’18. Experience makes you appreciate that although in a bull market the probability of continuing the trend is greater than stopping for a correction / consolidation / ugly crash, it doesn’t mean that the unlikely will not happen — unlikely is not equivalent to impossible. Thus, veteran traders would have begun to reduce their long exposure. It is the experience and the appreciation of risk that empowers these traders to survive and become veterans. This is what happened next. The Dow Jones Industrials Index dropped over 2500 points in a matter of days, wiping out the whole parabolic rally and some more! Though Dow Jones has recovered much from it, the deep dive has wiped out many traders with emotional bias such as “This is just a pull back”, “I shall not quit at the darkest hour before dawn” — Market remained irrational just for a few days, before they could remain solvent. Let’s take another example. Not every time the stock breaks through the threshold level smoothly, does it? Therefore, experience here comes to aid as it keeps you calm and patient when the stock makes a false breakout or dancing around the threshold levels. Experience means a large number of trials, a big sample, statistically sound prediction. Thus you could sit calmly when the stock is going sideways or going against you — you understand such cases are bound to happen, and they are not the ones (that make you money)! So you will and give them up and give yourself a break, rather than feeling a little frustrated having to cut loss short on the false breakout. How to get the large amount of experience without financial ruins? You know it now. With paper money, you will gradually stop thinking profits and losses as tangible stuff such as an iPhone, a camera, a month’s rent or salary. When you stop thinking money as stuff but multiples of risks involved, you are closer to emotionless trading. Examples: I risked 1R (100% of risk parameter, which could be 5% of account size) and made 3R. I risked 2R and cut loss at 1.7R, etc. Since it is not real money, you: stop wanting home runs in one trade because the fake profits don’t get you better houses or cars. feel OK to obey the rules for capital allocations feel OK to cut loss and cut loss short. Before you know it, these practices become habits and then become you. The idea of “show hands”, “be tough and hold on” stop occurring to you. Then your trades look like these, managed losses and occasional great wins… With enough practice, You become extremely impatient with losing trades but very patient with winning trades. Wouldn’t you like this? — I hope someone told me these words when I began trading! To Develop A Trading Edge Now, lets move one of the key reasons I still paper trade. Market dynamics change, and so do the market internals. Being an options trader, my trades are structured and designed as per my biases around Delta, Gamma, Theta or Vega. Whenever I have an untested trade idea or hypothesis, especially one whose risk is undefined or unclear to me, I trade those on paper money. I develop my hypothesis, trade plan, key points to watch out during the life of the trade. I develop comprehensive trading system summary and my scorecard for that new trading hypothesis. Then I trade that hypothesis. Trade develops through various market moves. I take note and revise my hypothesis, if need be. I do that again. Then I repeat the process, all over again. I do it many times before I start testing it with small amounts of real money…and again…before committing large capital to it. Paper trading or simulating your trades is essential for your long term success in trading. There is no short cut. It can save you from potential emotional disasters and/or financial ruins. Did you paper trade before diving into real-money trading? What did you learn during paper-trading? Was it worthwhile to paper trade? What will you suggest to a new trader? 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. 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. Related articles: Pros And Cons Of Paper Trading Are You EMOTIONALLY Ready To Lose? Are You Ready For The Learning Curve? Why Retail Investors Lose Money In The Stock Market Why Simple Isn’t Easy Thinking In Terms Of Decades Can you double your account every six months? Is Timeframe Your Biggest Mistake? Are You Following "Tharp Think" Rules? Top 10 Mistakes New Option Traders Make

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 Optionnet Explorer (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.