Paper Trading Options
Option paper trading is a term used to describe how we may test an option trading system without employing actual money
. There are several major advantages in doing this.
1. You are able to prove to yourself whether the strategy you have chosen or been shown, is actually, a consistently profitable one. Furthermore, it allows you the means to tweak and refine the system and see the financial outcomes with no real exposure to risk. This can give you a belief in the system itself.
2. The experience of option paper trading "trains" you how to respond to adverse market scenarios. Part of any worthwhile options trading system is the assmption that a percentage of trades will be losing ones. You'll need to be psychologically prepared for this. If a predetermined stop loss is part of your system you'll need practice in accepting losses before you decide to use your own capital.
3. The best options traders tell us that 90 percent of trading success depends upon psychology. You need the right state of mind when reaching trading decisions. If you assume the mindset of a gambler, you will know the pain of gambling losses. It is absolutely essential that you approach your trading with the mindset of a professional entrepreneur. On a daily basis you will make business decisions in accordance with strict criteria. You will have to have patience and wait for the best setups and confirmation signals so that you do not make the mistake of attempting to predict the market before it shows you where it's going.
You will need to practice how you manage your trading capital and use position sizing in a methodical way so you don't risk too much of your money on any one trade. You may need to make some mistakes of this type and "feel" the consequences of greed or needless risk. Option paper trading is not just about how to identify trading opportunities, but also about mastering the self discipline that is so necessary if you want to realize success.
How and where to Paper Trade
The preferred options brokers like TradeKing, OptionsXpress and ThinkorSwim, include an attractive feature that permits you to paper trade without resorting to real money. They provide you a "Paper Trading" tool, where live options prices are applied to live stock prices and you can try out your trading strategies without risking real money. But the rest is real, including trading reports which keep track of all your deals and brokerage costs, so that you can observe what your profit or loss would have been, had you been trading with your personal funds.
Just add an imaginary amount of money to start with and then proceed with implementing your trading plan. This is a terrific way to gain real confidence that you can actually make a living trading options.
One last thought. Option paper trading must be taken seriously for it to be truly beneficial. A casual approach which neglects to monitor your trades or enters doubtful positions because you know that you can't really lose, is a dangerous psychology. Believe me, when you graduate to using real money, everything will change at an emotional level ... so to make use of it as a serious training ground and you will be rewarded.
by: Owen Trimball
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