Why everybody should be virtual trading

Virtual trading is something that I think is a highly overlooked tool that any trader can use to make themselves a better, more effective trader. In this 3 part article I will look at several reasons why I think any trader should be virtual trading. Then I will jump into some good practical, hands-on ways that you can use to put virtual trading to work for you, and then finally some good tips and cautions to make sure you get the most out of your virtual trading experience.

Virtual trading goes by many names - "paper trading", "simulation trading", "fantasy trading", "practice trading". But no matter what you call it, the fundamental idea is the same. You are pretending to trade something (stocks, futures, options, etc) without actually trading the real thing. For the purposes of this article I am mainly referring to stock and options trading, but the same principles can be applied to just about anything.


Part 1 of 3 - Why everybody should be virtual trading
Beginning traders are the first people that come to mind when I think of virtual trading. Even though I think it can help all traders, I think beginning traders need it the most. The stock market is not a place to get rich quick by any means! Some people see it as this magic place where people make fistfuls of money for very little work. Granted some do, but I'd rather not find out I'm not one of those lucky few after putting my own hard earned money on the line and losing it all. The markets can be a harsh and unforgiving world for those who haven't learned the skills necessary.

Virtual trading provides several benefits to beginning traders. First of all it allows them to get their feet wet in the markets, and get a feel for what it's like. Then after trading for a little while a trader will start to get a good feel for their trading style, risk tolerance, and maybe some favorite strategies. Once a trader has learned a little more about how and where they feel comfortable trading, they can start honing in on those areas and gaining more specialized expertise. There is no right answer for trading the markets. Some people think they have the win-all and be-all strategy for the markets, but they really don't. You have to pick the style of trading that fits you. And you will only find that by being active in the markets.

Why risk your own hard earned money before you know what you are doing?? Sure some of you probably have loads of money and can risk a small piece to get going. Others of us only have a small amount that has taken years to save back. My advise to you is to virtual trade until you have proven to yourself that you have found your niche, and can be successful at it. Then you can put your own money out there with confidence knowing that you already have proven skills you can use to make a profit in the markets.

For all of you more experienced traders I still think virtual trading holds two very important benefits. I have met some very successful options traders in the past (read multi-millionairs who started with a few thousand), and every single one of them said that they made a habit of trading unfunded virtual trades in addition to their normal trading. When asked why, they usually gave two answers. They used virtual trading to learn and develop new trading strategies, and to maintain an edge on the strategies they were already using.

Once your accounts start growing and you have more money to trade, you will probably want to start diversifying trading strategies. For example, I have been trading long strangles on stocks, but I am now starting to diversify into iron condors to help hedge against markets running flat and causing big losses. Also, I would have a hard time trading either of these strategies on an account much over $150-200,000 because you need to keep trade sizes small enough to remain very agile in the entrances and exits.

When learning a new strategy in some ways you almost go back to beginner status, especially if the new strategy is much different. What better way to tinker around and fine tune your trades than to trade the new strategy with unfunded virtual trades? Once you have built a solid record of virtual trades, then once again you can take the strategy live with confidence.

Even if you're not attempting to learn a new strategy, any trader that has been around for very long knows that the markets are continually changing. Trading is part science and part art. You can rely on technicals, but those only help tell you what is happening, it still takes a special feel and skill to know what to do with that information. Because of this, I feel that is is good to always run at least a few virtual trades along side of your normal funded trades. You can make little tweaks and changes, and then watch how the two accounts compare. Often you will find that you can sense changing market conditions a little sooner this way, and already have a few adjustments ready to implement. Or maybe you have a trade that looks really good, but you just have that funny gut feel about ... just do it in an unfunded account and see what happens. Who knows, you might find some adjustments to your strategy on accident :-).

To be continued ...

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