Sunday, June 15, 2008

Why use a paper trading account?

Paper trading is trading with a fake account. You can place trades just like a normal account but the wins and losses you experience in a paper trading account does not hurt or help you financially. This is something all traders should use before putting any real money into the market.

I know a lot of you might write off paper trading as useless, after all why you would want to put your time and energy into something that doesn’t help you. That is not so, it is one of the most important parts of trading. There are a few reasons why it is beneficial to use this method before you trade.

The first reason someone should paper trade first is so they get a feel for the market. It is important that you actually learn how the market likes to move before you put money in. You must be comfortable enough so that you will not panic if the market has a pullback.

The second reason why you should paper trade first is so you can figure out if you can actually make money with your system. If you make money that is great you can use what you’ve learned for your actual account.

If you are not making money it is better that you found out on paper then with your real money. I do not believe anyone would rather lose $1000 real dollars over $10,000 fake dollars.

The third reason is that it helps you to test new systems. Maybe you want to develop a new system for trading every now and then. In this case you would want to test it out by paper trading before you use your actual money.

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