I’ve decided to use the Wall Street Journal’s Virtual Stock Exchange on Market Watch for paper trading. From what I can tell, there isn’t a simulator that makes real time trades. Think or Swim’s Paper Money is nice because it uses their real trading platform, but everything is delayed 20 minutes and its not online. VSE is a web-based interface similar to an online broker account that I can use to track my results and easily share on the blog (see links above). However, here are some of the differences from reality that I can see:

1) Trades take 20 minutes to execute. This 1/3 hour waiting period means trades are not filled instantly like with real life online trading.

2) However, prices mirror reality for the most part. While the quote on VSE is 20 minutes delayed, the trade executes at the price at the time you made the trade. After about 20 practice trades, I have found the price that goes through is usually within a couple cents of the price on the ticker. So I use my TD Ameritrade account to see the real price quotes, put a trade order in on VSE, and when it is filled, the price has so far been very similar to what I was seeing on TD Ameritrade when I pulled the trigger.

3) On VSE, I’m using market orders for the most part (except for swing or long term trades). This is because of the execution delay. If you put a limit order on a stock that is on the move, it will take 20 minutes to know whether it went through or not. In real life, I will always make LIMIT orders. If a limit order doesn’t go through because of a falling or rising stock, you know instantly. But for efficiency sakes, when I want to make a day trade (and other types of trades) on VSE, I will use market orders. This will likely reduce my virtual results as I assume I woulld likely get better prices if I was using limit orders.

4) I am able to use stop limit orders to help cut loses quickly. However, with the 20 minute delay, VSE won’t let me put in a sale stop if I don’t own the stock. So there is a twenty minute window if a stock goes quickly in the wrong direction, there’s nothing I can do to stop it for that 20 minutes. In real life, I could try to stem loses right after a trade. I think this will simulate the reality that you can’t successfully unload a stock sometimes when there is a sharp price drop or rise. I think in general this will have a break even effect on my paper trading results.

5) VSE will allow me to short any stock; in reality, for some stocks, you often can’t find shares to borrow. I do have accounts at four different brokers, so this should help in reality to find short borrows, but it will not automatically happen as it does in paper trading. This will inflate my results. UPDATE: I’ve decided to use a virtual coin flip to determine if a stock is available to short in my practice accounts, with a 50% probablity that I can borrow them. Heads -> yes, Tails -> no. Hopefully this will help make the virtual results more realistic.

6) Emotion and stress are not as high or tense when not using real cash. I think this is true, but I am invested in seeing my virtual accounts grow green. One because I’m posting them here on the blog, but also, I’m using them as a guide to signal I’m ready to trade real money. It’s not the same, but I was nervous this morning, even though I wasn’t making real trades.

I’ll post later looking at some of my initial trading outcomes.

Do you see any other ways paper trading is different than trading with real money?