The Tech Stock Investor

Paper-trading has long been touted as an excellent way for budding investors to learn the ropes. The reality is quite different. Paper-trading involves an investor making “simulated” purchases of a stock and recording the price purchased in a notebook or on a spreadsheet. Then when the stock moves up or down according to the trader’s rules the resulting gains and losses are recorded every time the trader “trades”. There are a few problems with this methodology.

Fear and greed are much more likely to be involved in real money trades. Nothing gets the adrenaline running faster than the knowledge that you just threw ten grand at a stock hoping it will skyrocket. Well, maybe one thing will get it running faster: watching the real money traded stock tank twenty percent while realizing you had not placed a stop loss order ahead of time.

The market moves a lot faster in the real world versus the simulated one and investors who learn paper trading will be surprised at how much things change as they throw real money in the ring hoping for a score. Spreads and slippage are not usually tracked as well on paper as they are by the broker. Some newer investors also back test “strategies” on paper only to get flushed out of the market as they realize that strategy was good twenty years ago on historical data but leaves much to be desired in today’s market.

Using paper trading does have one advantage: it can teach a green trader the mechanics of the market without risking real money. He can learn about stop loss orders and good-till-canceled orders without the fear involved in real money. That is the only real benefit that I know of to using paper trading. Like any myth, paper-trading is far and wide touted as a great way to learn, just remember it is a great way to learn the mechanics of the market but it will never replace reality for the rest.