Those of you who have worked with me know that I am not the greatest fan of paper trading, or sim trading. The reason for this negative bias is simple: Most traders use sim trading for the wrong reasons. They believe that profitable simulator trading proves that they can trade equally as successfully trading live. Traders place emphasis on showing a profit as the benchmark of trading success or failure.

Here is the main issue with simulated trading:

Deep down you know that you are not trading real money. When you have a losing trade it is not affecting your account, hence your psychology won’t be the same as trading real money. Your trading psychology is the main determination factor of trading success. I cannot state this truism often enough.

Let’s take a look at what tends to happen when you paper trade: Let’s say that you hAve posted three losing trades in a row. Your trading psychology will still be pretty unaffected by the three losing trades. You take the next trade which turns out to be a winner. Once you placed the trade and the position starts going your way, you move away from your screen and make a cup of tea. Upon your return your trade is nicely into profit. You tell yourself that you can handle three losses in a row easily. But, is this really true, or are you inadvertently deluding yourself?

Now ask yourself this question: Would you have performed in exactly the same way if you were trading live? The answer is probably “no”.

Research shows that most traders find it very difficult to follow their system if they have three losing trades in a row. In fact the majority of traders abandon their system at this point and make alterations to their approach. You may be lulled into a false sense of security when your sim trading seems to be producing very good results while whenever you switch to real live trading your results are less consistent. You may exit positions much faster which you would hang on to in your paper trading. It is not real money. Be aware that this fact is always at the back of your mind.

Sim trading is a great tool though as it hones your trading management and execution skills. You should use it regulalrly in adition to live trading. It will boraden your mind set, make you more nimble and improve your trading skills.

There are three skills that help you to trade better and they can be trained on a simulator. Here they are:

Those of you who have worked with me know that I am not the greatest fan of paper trading, or sim trading. The reason for this negative bias is simple: Most traders use sim trading for the wrong reasons. They believe that profitable simulator trading proves that they can trade equally as successfully trading live. Traders place emphasis on showing a profit as the benchmark of trading success or failure.

Here is the main issue with simulated trading:

Deep down you know that you are not trading real money. When you have a losing trade it is not affecting your account, hence your psychology won’t be the same as trading real money. Your trading psychology is the main determination factor of trading success. I cannot state this truism often enough.

Let’s take a look at what tends to happen when you paper trade: Let’s say that you hAve posted three losing trades in a row. Your trading psychology will still be pretty unaffected by the three losing trades. You take the next trade which turns out to be a winner. Once you placed the trade and the position starts going your way, you move away from your screen and make a cup of tea. Upon your return your trade is nicely into profit. You tell yourself that you can handle three losses in a row easily. But, is this really true, or are you inadvertently deluding yourself?

Now ask yourself this question: Would you have performed in exactly the same way if you were trading live? The answer is probably “no”.

Research shows that most traders find it very difficult to follow their system if they have three losing trades in a row. In fact the majority of traders abandon their system at this point and make alterations to their approach. You may be lulled into a false sense of security when your sim trading seems to be producing very good results while whenever you switch to real live trading your results are less consistent. You may exit positions much faster which you would hang on to in your paper trading. It is not real money. Be aware that this fact is always at the back of your mind.

Sim trading is a great tool though as it hones your trading management and execution skills. You should use it regulalrly in adition to live trading. It will boraden your mind set, make you more nimble and improve your trading skills.

There are three skills that help you to trade better and they can be trained on a simulator. Here they are:

1) Flawless execution of your trades. While execution mistakes will happen from time to time, you should be totally comfortable placing your orders in all market conditions. This is mainly technique. A trading simulator is the perfect vehicle to help you develop perfect execution skills.

2) Recognise your trading set ups with speed and ease. Every trading system has a number of rules which tell you when to trade and when not to trade. It is easy to go back on a chart and say: “here is an entry, here is an exit…” Seeing set ups as they develop is the real skill and one you need to have. A trading simulator is perfect for this. You should use a trading simulator practicing at recognising and taking all your trading signals.

3) Managing your trades. How you manage your trade makes a big difference to your trading success. In my opinion it is not so much about entering a position with razor sharp precision. “Don’t be a prick for a tick”, as the saying goes. However, quickly spotting how market patterns evolve, change and merge into new ones, where you set your stops, position sizing, how you trail stops, when to scale in and how to scale out of positions are, all vital componenets of your lasting trading success.

How well you are able to implement the above ultimately depends on the soundness of your trading psychology.

Developing these skills in real live trading can be challenging. When your mind is calm you observe more of your thoughts and resulting actions. Sim trading allows you to focus fully on observing price action without the additional stress of worrying about your account balance.

This teaches you to notice your trade set ups early and become comfortable with trading them on the simulator. Sim trading allows you to play with your system and make adjustments. The practice builds new neural pathways strengthening your trading mind set.
When you are confident that you are recognising your trading set ups quickly and easily in all market conditions and have honed the intuitive feel for the best set ups you will find the transition from sim trading to live trading much easier.

Trading mastery is about your trading psychology first and foremost.

Your trading techniques evolve from s sound trading mind set. Your trading psychology is best tested in small, real live trades. No amount of sim trading will get away from this fact. I feel that you can only accurately assess your risk appetite and your ability to stick to your system once you hit a draw down period when real money is involved.

Money has a way of bringing out in us our deepest emotions in a way no trading simulator ever will. Be aware of this and use simulated trading in the knowledge that it will build your confidence in yourself and above all in your system and system execution. This will make life much easier as you approach both sim trading and live trading with the right attitude.

Sim trading won’t necessarily show you how profitable your system is going to be. Only live trading will do that for you. This is where most traders fall down. They equate the results of sim trading with real live trading. The moment they realise that the trading results of their life trading don’t match the results of their sim trading they become too emotional.

Your sim trading psychology is diffrent from your live trading psychology.

Be aware that while your trading psychology may not be adversely affected by losing trades when you are in sim trading mode, therefore you might take trades you would not take when trading live. This would obviously skew trading results.

This is precisely why I think that sim trading is of limited value. It will tell you nothing, or at best very little about your true trading psychology and how you will act when real money is involved. In other words sim trading is not a measure of the stability of your trading psychology, nor is it a measure of your trading ability. That is okay, as long as you are aware of these caveats.

Use sim trading to hone your skills, test new approaches. Use it to play and develop trading creativity.

It is not about whether or not you are making money in your sim trades. Trading is a game. Use sim trading to improve your game and take trades you would never take in real life trading. But do this with conscious awareness. Set the intention to use sim trading to hone your conscious awareness. Notice how you feel and notice your thoughts when you sim trade. Take notes. Observe your actions and thoughts for clues of your weak spots and your strong points. You might glean valuable insights you could use to improve your trading plan.

Learn from the feedback the simulator results give you. Notice your emotions and give yourself permission to trade loosely and creatively. Who knows, you just might discover something you would have never discovered in real live trading because you would not dare step out of your self imposed box of rules.

Don’t make the mistake to use your sim trading P & L as a measure for your trading abilities. If you want to test how well a system stands up back test it and trade it in small size without leverage to begin with. The results from your back testing will give you confidence to use the system and fine tune it trading small size to suit your trading personality.

Sim trading gives you freedom. Use it and learn about yourself in the process. This is how your trading can improve.Hone your trading psychology in different ways. All said and done, you are your greatest trading edge.