Some may say, paper trading biases performance of money involved. It might be true but if implemented with full discipline, paper trading should produce the same effects as real trading.
Paper trading enables you to test your portfolio strategy before going into real trading.
Paper trading as the name suggest, requires you to trade either in daily, weekly or monthly trading without real involved but only tracking the prices of the stocks. Paper trading should have a complete trading strategy,so this means:
a. Should have an entry strategy- when to enter buying stocks.
b. Should have an exit strategy- when to leave or sell the stocks.
c. Should have a money management strategy- how much profit would like to made, how much losses are you willing to accept, or how much is your stop?
d. Incorporates trading commission to simulate real events.
Paper trading can be done in MS Excel, I have tried it before and it works. So basically before you start paper trading, make sure to comply below:
a. List of stocks you want to track and include in your portfolio. In this step you need some tools to completely track the stocks. This is very important because the quality of your stocks affects the profitability of your portfolio.
b. When trading online, have a portfolio online. Yahoo finance offers a free portfolio where you can manage your stocks.
c. Decide on your trading plan. See above for my advices on having a complete trading strategy.
d. After deciding on the trading plan. List all your stocks in a complete spreadsheet and track it at one glance, monitor and update it according to your stock trading plan.
e. Trade- enter and sell stocks in time according to your trading plan.
f. Evaluate your trading plan and your portfolio- the most recommended is after you have reached at least 100 trading points per stock in your portfolio. Then you can assess one by one performance. This is the time to stop trading for a while and analyze the results of your paper trading.
g. Correct or continue your trading plan if necessary, have one last test to replicate the results before you go to real trading.
Paper trading in order to be successful is to treat it like a real trading. One of the most important things to track when you trade portfolio is the STOCK PORTFOLIO EQUITY. And the best way to track is to plot it. See sample equity curve below:
As shown in the equity curve, I have 5 trading events and all of it are wins. It is why there is a growth in my equity. In short, I am earning money with this paper trading.
But do not judge your paper trading performance with 5 trading events, typical winning scenarios at stock is only at 50% so this means that if you have 100 trading scenarios, only 50 of it will result to winning. Without money management strategy, you will never earn money from trading.
