Why Paper Trading Matters

A cautionary note. When I am working with a new member, I always implore them to trade on a simulator or “paper” account. Why? It’s like walking into a Ferrari dealership and just announcing that you want to take the new 2017 Ferrari GTC4Lusso for a quick spin around the block. Truth be damned by the fact that you may have never even sat in a Ferrari much less driven one. You may have had the best intentions. You may have been careful. All of that means nothing when you wrap a $300,000+ race car around a light pole. Just like you need to know how to read the gauges, where the controls are, what the car is capable of, you need to take the same approach with your trading account. How do I enter a trade? How is my available cash or margin affected by a given trade? How do I place an exit order or a stop?

That’s just the nuts and bolts; we are not even addressing learning the trading methodology. In addition, do not get overconfident when you achieve success trading on a simulator. Remember who provided you with this simulator…a broker. How does a broker make money? They make money executing transactions that generate commissions. They want you to gain the confidence necessary to go from the simulator (no commissions) to the live market (cha-ching)! If you look closely, you will find that you buy a lot closer to the bid and sell a lot closer to the offer on a simulator than you do in the real world.

Buying the bid and selling the offer is what a market-maker gets to do, typically not what a retail trader will experience.

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