Welcome back to the third and final part of my series on virtual trading! If you haven't done so already, be sure and read through part 1 "Why everyone should be virtual trading" and part 2 "How should I virtual trade?". In this part I am going to cover some potential pitfalls that can hinder the effectiveness of your virtual trading experience.
Part 3 of 3 - What are the disadvantages of virtual trading?
As with anything, virtual trading is not perfect. Being diligent and using the right tools can give you a very realistic virtual trading experience, but there are a few things you should be aware of. First of all no virtual trading system will be able to replicate order fills perfectly. In the real world buyers and sellers have to be matched up for a trade to take place. And that can not be perfectly simulated. Following are several aspects of this to keep in mind:
- Virtual trading may not account for trade size. For example, if you are trying to trade 100 contracts of an option with an open interest of only 50, you will never get filled. However, most virtual trading platforms will fill the order if the price matches your conditions.
- It can also take longer to receive a fill in the real markets. From what I've seen paperMoney does a decent job at that by only filling an order when a live order has executed at the same price or better. I have not however checked to see if they track order size.
- Virtual trading doesn't simulate negotiating the bid/ask spread. In real live trades you can often negotiate up to 1/3 of the spread using limit orders. For the specific strategies I use I don't count on that, but some do so keep that in mind. Negotiating the spread can also affect fill times.
Also, regardless of how much you try and convince yourself, the reality is that it's still not real money at stake. Psychologically you will take slightly bigger risks, or play out trades a little different. After time and practice this can be kept to a minimum, but it's something else to be aware of (or not aware of). On the flip side though, I have found that taking those greater risks has helped prove to me that sticking to a game plan is important. It helped me see during un-emotional trades how well things worked when I traded very logically. If you're doing funded and unfunded trades side-by-side this becomes even more obvious, which has helped me to keep emotions out of my trades. I have gotten emotional about an identical real trade and lost, while my virtual trade that stuck to the game plan turned a good profit.
Finally, you can see all kinds of virtual profits that are "good for nothing". Some people ask why I would waste perfectly good profit opportunities trading virtually when I could just use real money and have something to show for it. The problem is that those opportunities also bring risk. When I'm virtual trading it's either because I'm out of real cash available to trade, or I'm not 100% confident in the trade. Now I understand that trading is all about risk management, but I'd rather practice my risk management with play money until I reach an acceptable risk/reward track record. That level will be different for everybody so go with what makes you comfortable. If something falls below my comfort level, I virtual trade it that way I still get the learning value from it, but without the financial risks.
Have you learned any lessons on virtual trading lately? If so, leave a comment and share it!
4 comments:
"if you are trying to trade 100 contracts of an option with an open interest of only 50, you will never get filled."
Disagree strongly.
Every option trades for the first time and has an open interest of zero. That does not mean the market makers will refuse to trade size orders.
High OI suggests it's easier to enter and exit positions, but to say 'never get filled' is simply wrong.
"It can also take longer to receive a fill in the real markets."
Not when the orders are entered electronically.
"Now I understand that trading is all aotteribout risk management, but I'd rather practice my risk management with play money until I reach an acceptable risk/reward track record."
Good idea.
@ Mark Wolfinger - On the never getting filled comment, that is a very good point. Thanks for the correction! I should have probably said something more like "may never get filled" though there's never a 100% guarantee of a fill no matter what the IO is. The main point I was trying to make is that while a virtual account might fill immediately, in real markets it could take significantly longer due to lack of volume.
What I was referring to on fill time (and have seen in the past) is that some virtual platforms will fill orders based on "theoretical" price. On the "floor" there may not be an opposite order to match and fill yours immediately when the "theoretical" price hits your limit. I've had to wait and watch real trades sit out there for 20-30min with the quotes showing at or better than my limit. You're right though, the actual fulfilling of the order is near instantaneous w/ electronic orders.
Thanks for the great feedback!
Agree when you add those details.
Firms should make virtual trading as realistic as possible.
i would just like to say that the words "virtual trading" *really* seem sexual to me! haha... that is all.
(sorry, next time i'll try and contribute something worth while - just couldn't help my self.)
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