How should I virtual trade?

Welcome back to the second part of my 3-part series on virtual trading! If you haven't done so already, be sure and ready through part 1 "Why everyone should be virtual trading". In this part I am going to cover some good practical advice on how to ensure that you get the most out of your virtual trading experience. I will also give some ideas on what tools you can use to make virtual trading as accurate and efficient as possible.


Part 2 of 3 - How should I virtual trade?
This can be as simple or as complicated as you want it to be! I have used various methods of tracking my virtual trades and the tools available now are much more advanced than what I started out with. The methods you use to track trades are not vitally important. Find a method that works well for you and stick with it.

What is more important is to make very sure that you are closely simulating a real-life trading environment. In order for virtual trading to work effectively you must make it as realistic as possible! The following list covers the essential items to ensure that you will get the biggest benefit from your virtual trading experience:

• "Fund" your virtual trading account with a realistic amount of money. If you have $10,000 of real cash to trade with, then don't go creating a $100,000 virtual account to trade with. You will be a sloppy, careless trader and will learn nothing more than how to throw up a million trades and maybe get lucky.


• Treat your virtual account like it's real money. You can't expect to learn anything if you don't treat it like the real thing. For every trade, stop and think "Would I do this if it was real money?" This rule is more for the beginning traders. For you more experienced traders, I mentioned using virtual trading to try out questionable or new trades. You're mostly exempt from this rule, but you still need to keep it rational.


• Don't trade in hindsight! One temptation is to enter your orders at the end of the day by looking at the stock price and think "Oh I could have bought this stock here." NO!! You put in conditional orders before the trade, just like any real trade. How you do this will depend on your tracking method, but make a static note of some kind beforehand what your entry/exit conditions will be. Unless you are backtesting a specific strategy (a topic for a whole discussion of it's own) you do not pick your trades in hindsight.

Now that the important points have been emphasized, let's take a look at some ways that you can use to implement virtual trading. I originally started out years ago using a few paper forms and file folders to track trades. It was cheap, and worked fine for the slower moving stock strategies I was using back then. However monitoring trades written down on paper can be cumbersome, and there are much better computerized methods available. If you are just going to be trading a few stocks this method could still work, but any more than that and I'd highly recommend finding a more automated method.

The next thing I used was a simple spreadsheet to keep a record of trades, profit/loss, and running totals. I actually still use this method for tracking the performance of my individual strategies. This method is also very cheap. If you don't already have Microsoft Office there are also free alternatives available. I currently just use a Google Docs spreadsheet so it is accessible from anywhere I have internet access. The other advantage is that there are almost endless possibilities for tracking and mining data from your spreadsheets. There is however still the disadvantage of not being directly tied to the markets. This makes it very difficult to virtually trade options if you buy options with the stock price as a trigger like I do. There is no good way to figure out what the option price was at the moment your trigger was hit. So I only use the spreadsheet to track trades after they are closed in my paperMoney account.

The best method is to use an online virtual trading tool, such as Thinkorswim's paperMoney. The great part about using an actual virtual trading tool is that it is tied to live (or 20min delayed) market data, which allows for the most realistic trading experience. It provides easy trade tracking and order history. I would highly recommend finding and using an online broker that offers a virtual trading tool! The additional advantage you gain is that your virtual trading platform will closely match the platform you use for live trades. This helps to make your virtual trading feel a lot more real, and it simplifies the transition from unfunded virtual trades to funded live trades.

There are a lot of social fantasy trading sites for stocks, such as Wall Street Survivor and Covestor. Unfortunately I still have not found any good sites for trading options other than a few of the online brokers such as Thinkorswim, OptionsXpress, and Zecco. I personally use Thinkorswim (ToS) for both my virtual trading (paperMoney) and my funded trading. The great thing about ToS is that they use the same platform for all trades. If you want to virtual trade you log into your paperMoney account, and if you want to make funded trades you just log into your normal account (same login credentials). This makes for very realistic virtual trading and ease of use. I have been very satisfied with their customer service even for issues with paperMoney. So far I've always received a resolution within a couple minutes via an easy-to-use online chat feature built into the platform.

If you want to sign up for a paperMoney account just go here and sign up. They may start asking questions for funding a live account, but you can just cancel out of the registration at that point (it's been while since I signed up for mine). They will let you demo their platform and virtual trade before funding an account. I used mine for about 2 months before funding, and a friend used it for longer than that.

To be continued ...

Be sure and subscribe to my RSS feed so that you don't miss part 3 "Downfalls of virtual trading". And, if you would like live trading updates be sure and follow me on Twitter.

Part 1 of this series was recently featured in the 191st Carnival of Personal Finance. Be sure and check it out.