Trading Simulators – Learn to Trade Without The Risk

Stock market simulators offer a way for new traders to practice trading with no financial risk, but do pose the threat of bad habit reinforcement and producing unrealistic expectations.

What are Day Trading Simulators?

Day trading simulators, also known as paper trading platforms, are applications that replicate the experience of real-time trading in a simulated environment where real money is not at risk. You’ll get access to a virtual trading account, which comes with virtual funds that can be used to execute trades in almost any market. This can include stocks, options, futures, and forex etc.. A good simulator will use real-time market data, giving you the experience of the live ups and downs without hard earned capital at risk in a live account.

Using Simulators Effectively

To make the most of a day trading simulator, it is important to have a strategic mindset and use it as a learning tool. Nothing more and nothing less. Spending too much time using it can be just as dangerous as spending not enough time using it.

Strategy Development

Simulators are great for building and refining your trading strategies. You can test different entry types, exit types, indicators, and management techniques to see how they perform in different market conditions. By experimenting with various strategies without the fear of losing hard earned money, you can more easily identify what works best for you.

Market & Platform Familiarization

If you are just beginning and have never placed a trade before, simulators can be a way to ease into how markets act. You wouldn’t have a doctor who has only read books on open heart surgery perform an operation without first shadowing and assisting other surgeons. The same goes for trading. Jumping into the live market with only book knowledge would not be a wise endeavor.

In a paper trading environment you can learn how the platform works without a mistake costing you real money. You can experiment with order entry, how the different order types work, how to monitor a position, and how to best configure the platform for ease of use. A miss-click in a live account could be the difference between a manageable loss, or an account blow up. Best to make these “fat finger” mistakes on paper.

Limitations of Simulators

Paper trading can certainly be beneficial but, as we mentioned earlier, they do have limitations. Simulators can not fully replicate the experience of real trading when your hard earned money is on the line.

Lack of Real Money Impact

Simulated trading does not involve real money, which affects the psychological aspect of trading. This is by far the most important thing to make note of. You will absolutely experience different emotions when real money is at stake. And because you may not have felt these emotions in the paper platform, the possibility of making an illogical decision is greatly increased. You must be mentally prepared to make the transition to real money with position sizes that are in alignment with your risk tolerance. You’ll feel greed, fear, and ego all come out to a new level when real money is at stake.

Slippage and Market Liquidity

Simulators do a very good job at showing real time price action. What they don’t do a good job of is giving you realistic fill prices. Because your orders are not actually being routed through an exchange, more often than not, paper trading platforms will give you overly optimistic order fills.

If you place an order to fill 1000 shares on a paper trading platform that order gets “filled” at the best available price if you use a market order, aka the bid. But in the live environment more realistically the market depth may only fill 100 of those shares at price x, another 200 at price y, and then the last 700 at price z. This is especially true if your strategy involves trading low float companies.

So if you are breaking even on a paper trading strategy, just understand that the strategy will likely not be profitable or break even in a live market environment. True fills, true slippage usually will not grant you the picture perfect fills that paper trading will.

Unrealistic Expectations

The biggest mistake that newer traders make when using day trading simulators is using a simulated account size that is not even close to what they will be starting their real money account with. If you intend to start trading with a $5,000 account, the paper account size should also be $5,000. If you intend to start trading with a $500,000 account, the paper account size should also be $500,000.

Example

Let’s say you intend to start a live account with $5,000 but are paper trading with a $100,000 account. Firstly, you’ll have access to way more leverage than your real account can handle. You’ll get a taste for trading $100k positions which will have wildly different P/L swings than the more realistic $5,000 account. A one percent move on a $100k position will net you $1,000 whereas that same one percent on a $5,000 position will net you $50.

You’re doomed to think you must hold until you get that same $1,000 amount. The trade might not pan out with the longer than intended hold time and now turns into a loss. You do this repeatedly, and suddenly the account is blown up. Oh wait, it’s paper money, you can just reset the account! Or maybe to get the same $1,000 you decide to scale up and risk everything on one trade. All it takes is one wrong move from the market and you’ve blown up again. You can see how the spiral of bad habits gets reinforced.

In real money trading, there is no reset.

Conclusion

Trading simulators, or paper trading platforms, can offer you an opportunity to practice trading without the risk of losing real money. They provide a simulated environment that mimics the real market, allowing you to gain experience and test trading strategies using virtual funds. However, while simulators can help in strategy development and get you familiar with trading platforms, they cannot replicate the psychological impact of real-money trading or provide realistic order fills. Most importantly avoid developing unrealistic expectations by using simulated account sizes that align with their intended real-money trading capital.

By treating trading simulators for exactly what they are and are not, you can improve your odds of success before venturing into live trading with real money.