Paper Trading

THIS is where it ALL should begin !!
Financial training, to learn how to invest and trade securities, allows the beginner to try their hand and skills with a minimal cost without risking their intended investment resources.  This is  next to unheard of in just about any other trade.
PAPER TRADING allows you to do everything exactly the way you would if you actually had your money at risk in the market.
Paper Trading should be entered into with a VERY  serious presence of mind.  You should not approach this with the idea that you are "pretending" to be trading.
You should start with a ledger book of some sort that plainly states the exact amount of money that YOU would have to put at stake if you were to begin trading today.
Don't start with the typical one million dollar hand and pretend that the returns are what you would make.
You must start with ONLY the amount that you actually would have to put on a trade.  This is very important so that you do not misrepresent the effect that the commission percentage would have on your account.
Your sheet might look something like the one below:
Date Name Symbol Action Cost Commission Balance Percent
           
  • $5,000.00
  
  03/25/98 Microsoft MSFT Buy - 30 85.75 30 $2,602.50  
  04/25/98 Microsoft MSFT Sell - 30 101.25 30 $3,007.50 16%
           
  • $5,405.00
 08%
  05/10/98 PEP Boys PEP Buy - 100 21.25 30 $2,095.00  
  07/23/98 PEP Boys PEP Sell - 100 19.50 30 $1,920.00 ( 0.8% )
           
  • $5,230.00
 05%
You may also want to include another portion of your portfolio notebook where you can write comments and note to yourself regarding on what it was that you saw on the chart or the reason that you took the actions that you did.
This may sound trite, but it will prove to be most valuable when you begin to have a steady run of losses OR wins as you will be able to look back and see what it is that you do most consistently.
Try to concentrate on making a gain every time.  Why this is nearly impossible, you should strive to make "something" on any trade that does not go immediately against you.
You also want to make a point of writing down at which point you will exit your trade and why you chose that point.  Do this BEFORE YOU ENTER the TRADE !  You must do this to define your risk involvement.
You must make that decision while you are still not involved with the stock as you will not bias your opinion in order to protect your pride.  You may not think this to be a problem as you read this, but let it stay in the back of your mind, and you will NEVER forget this, when it happens that you can not force yourself to draw a line and exit a losing trade.
Paper Trading can actually be a very enjoyable hobby until you have built your confidence and understanding of the markets as well as funded your account to a point that it is affordable to trade.
As a general rule, you should be able to keep your total commissions, entry plus exit, to less than 3% of the total amount riding on the trade.  This would mean that the stock would only have to move 5% for you to be holding a winning hand.
Your money management rules will determine when you sell and how far against you that a trade may fall before you will sell it.
Keep the Rule of 72 foremost on your priority list and you will always do fine.
Copyright © 1998  Ray E. Knecht Consulting Services.
All rights reserved.