Tuesday, May 13, 2008

Paper trading to build confidence

Paper trading can be a great way for a new trader to build confidence in his trading system. It is something all traders, new and experienced should be involved in.

There are many reasons why a beginning trader should start with a paper trading account before moving onto an account with real money.

1. Protecting yourself from losses. When you are just starting out it is inevitable that you will experience losses. As with anything when you have no experience in trading you will make mistakes.

It is perfectly normal, even professionals make mistakes now and then, you can’t avoid them we are only human after all. You do not want these mistakes to actually affect your money.

2. Testing new systems. If you want to be a great trader you must have working systems that tell you when to get in and out of a trade. The best way to make sure your system is working is to actually trade it.

But you also do not want to test that system in your actual account before you know if it works. This is another reason that everyone needs to paper trade.

3. The third reason is extremely important to beginning traders. You must build your confidence. If you have no confidence that your system will work you will not follow it closely. You may take profits too early and hold onto bad trades longer hoping they will turn around. This goes against one of the most important rules, keep losses short and let winners ride.

Paper trading is the best way to build confidence. If you start making winning trades over and over again you will start to believe in yourself and your system.

So, how long should you paper trade before you get to the good stuff? The general rule is not to start putting real money into the market until you have had 2 profitable months in your paper trading account. But it really comes down to you. How long will it take you to feel confident enough to get into the market?

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