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BookingAlpha Option Trading Advisory

Wednesday, August 17, 2016

The Practice

It's common to hear that Paper Trading is useless, as emotions are not involved and therefore it will never be anything like real trading. Based on this, some people advice to not use a paper trading account and instead, jump straight to trading with real money, just with a very small amount as you learn the ropes.

On the other hand, paper trading is my playground. My lab for running all sorts of experiments. In addition to my regular trading, I've been paper trading for 7 years and have no intention of stopping. I think I know a little about the subject. At least enough to not look stupid when talking about it.

It is true that the emotional involvement is just not there. The emotions when real money is involved are much more intense. No comparison. So, in that regard, a Paper Money account will not train you for the psychological hardships of the game. However, the fact that I still have and regularly use a paper trading account is a strong point (at least for me) to disagree on the subject of its total uselessness, and here are my reasons:

- Familiarity with the trading platform.
Before using real money, I want to feel absolutely familiar with the execution in my platform. A paper money account is good for learning about all the different options, buttons, menus; how can I enter a custom order; how can I send an adjustment quickly. Basically, how do I become as proficient as possible with the tool that will help me grow my money, and also protect it in adverse situations. That level of comfort is required. It is not related to emotions, but to pure familiarity with the platform to avoid making stupid mistakes later when it DOES matter. Paper money accounts are the way to go for this. You can click everywhere and be a curious puppy without that fear of accidentally spending money on a weird fee or losing it to ill-timed, accidental trades.

- Experimentation with different strategies
Do you want to start trading a new strategy out of the blue just because someone tell you it is cool? Well, some people do, and it may be fine with them. I, however, prefer to paper trade new ideas for a few months, to give myself a chance to experience their ugly face, as no strategy is perfect fit for every market condition. That experimentation, is much more effective in a laid back approach/environment only provided by a Paper Money account.

- Analysis outside of your broker platform
Yup. I know you can run all sorts of complicated analysis of your positions in a Real Money account. I get that. But what I mean here is, the ability to use a platform of your preference for analytical purposes without having to deposit actual capital with a broker, for the purpose of enjoying their tools. For instance, many people in the world are not allowed to trade using the ThinkOrSwim platform. I think only the US, Canada and Singapore, as of this writing. However, many people from all over the world use a Paper Money account with ThinkOrSwim, just as an analysis tool, to define action plans, etc. This is only possible thanks to the existence of Paper Money Accounts. If the only way to use a platform was after depositing real funds with a broker, many platforms could not be exploited for study/analysis purposes due to legal regulations in different countries.

- Evaluation purposes
Before you commit to a broker, it is important to know how you feel using their technology. Forget about cheap commissions. If your broker platform is not user-friendly and you are just constantly lost; or if it makes you go through too many steps to accomplish basic actions that are frequent in your trading; if it makes you prone to making mistakes; if performance issues are too frequent; you may consider it is not the right broker for you. Better to realize it without having filled out a dozen forms, sent all sorts of identification documents and deposited funds. No need to go through all that hassle without the full conviction first, and the Paper Money account helps you make the right decision in this regard. Obviously, you want to choose your broker by analyzing more than their trading platform. But even if all else is excellent, if the platform doesn't meet your needs, it is just game over.

So, there you have it. Paper Money accounts: not totally useless.


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