Paper trading is an important step on the journey to becoming a professional trader. It is a great way to test your trading systems and strategies before you begin to apply them in the market with your hard earned money.

For example, you might decide to specialize in taking Double Top and Double Bottom trades. You could set yourself a goal of taking ten or twenty or fifty or one hundred “paper” or “virtual” trades, where you look for setups and follow them through as if you were actually trading them, keeping records of your results. This could be as simple as spotting the setup (a Double Bottom), waiting for the entry, then writing down on a piece of paper “Bought one Euro futures contract at 1.40, stop loss at 1.39, profit target at 1.45.” Or, you could use a free demo or virtual trading platform that most brokers provide, and make it as real as possible, like this one from City Index.

Once the trade is open, you just follow it through to the end and note whether you made a profit, a loss, or a breakeven trade. After doing ten (or however many you choose) you can look at the profit you have made and decide whether you are now ready to apply this strategy to real money.

This sounds pretty simple, but traders quickly learn that there is one simple yet major difference between paper trading and real trading – emotions. Once a new trader’s money is on the line, they can find any number of ways to alter their original plan. For example, they may see a Double Bottom form but not have the confidence to take the trade. Or, they might see a Double Bottom, take the trade, and then panic if it moves a little way against them and jump out. Alternatively, they may take the trade and do everything right, but when the market reaches their profit target, they don’t take the profit because they get greedy, and end up giving a lot of it back.

None of this is designed to scare you, only to prepare you for the tricks our emotions can play on us when we are trading with our own money.

I remember when I was learning to play golf and receiving some lessons from a professional. After an early lesson, I was sent home to practice my swing, and I practiced every day. When I returned for my next lesson the following week, my instructor asked to see my swing.

I lined up at the tee, did exactly what I had practiced, and he was very pleased – he told me my swing was much better. Then, he placed a golf ball in front of me and said, “Do exactly what you just did”. I lined up my shot and swung the club – only to watch the ball squirt off at an awkward angle.

The instructor pulled out the video of the lesson (this was before mobile phones!) and we went inside to see what had gone wrong. When I was making a practice swing, I was calm and relaxed and the club was following the correct path. However, as soon as a golf ball was placed in front of me, my body tensed up, only a little bit, but it affected my swing enough to make me look very amateurish!

My instructor said “all we need to do is sneak a golf ball in front of you without you noticing and you’ll be fine.”

What he was saying was that I was thinking and acting differently when the golf ball was in front of me to hit (like real trading), as opposed to when I was just going through the motions of a practice swing (paper trading).

Unfortunately, whether you are playing golf or trading the financial markets, there is no easy solution to this problem. However, the first step towards eliminating this problem is to be aware of it.

Paper trading is a vital part of any trader’s journey but at some stage, the step up needs to be made from paper trading to real trading.

When you have been paper trading successfully and the time comes to trade for real, be aware that you will quite possibly be confronted with a range of emotions and a range of reasons or excuses for veering away from your trading plan. Know that all traders go through this at some stage and find a way to execute your trading system and trading plans exactly as you did with your successful paper trading.

As with most things in life, your emotions can be your greatest ally or your worst enemy.

Be Prepared!

Mathew Barnes