Paper Trading: A Test Run of the Theory

Risk is present in all forms of investing. One of the troubling aspects to any new investing idea is this basic risk, and with options the lack of knowledge or experience adds to the overall risk. Anything new you try invariably will involve placing money on the line, even when you lack the experience to know for sure that the concepts will actually be profitable. So anyone new to options trading faces a dilemma: How do you gain experience without placing capital at unacceptable risks? And how do you know if a risk is acceptable until you try a trade for the first time?

This problem keeps many people away from options altogether.

Few traders are willing to gain actual experience if that means losing money along the way. Few people will simply acknowledge that loss is the price they pay to gain experience; in fact, the experience you are able to gain profitably is far more satisfying. But even if you are dubious about options trading due to misunderstood or unknown risk, there is an easy solution. You can educate yourself about a variety of trading strategies, even the most exotic ones, by using a free service offered on many financial web sites. This feature, called paper trading, lets you place trades with a fictitious starting portfolio of cash and see how it comes out.

Smart Investor Tip

Paper trading works best when it simulates a real-world environment. This should include limitations on portfolio size, timing, risk, and level of transaction you are allowed to execute.

Different web sites offer you a variety of features for paper trading. Selection criteria should include the following:
By Michael C. Thomsett
Michael Thomsett is a British-born American author who has written over 75 books covering investing, business and real estate topics.

Copyrighted 2020. Content published with author's permission.

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