The Hindu Business Line : Trader's corner

Harish Bhai had made up his mind that he would become a day trader. His family had almost every other male member connected with the stock markets in one way or the other. He was sure that he would be able to make a success of it. But he wanted to be methodical and systematic about it. So he decided to test his trading skills by paper trading for a few weeks first.

For those who have come in late, paper trading is nothing but trading with your pen and paper. The paper here is not that, which makes crisp rupee notes, it is notepaper. You decide on a trade, the entry price, exit price, stop loss etc. and then mark the entry price in your notebook, as the market touches the entry price. Note down the termination of the trade, either profit booked or trailing stop hit, on the same paper. This log will tell you how your trading strategy is working and if any modifications are needed.

Investopedia defines paper trading as "Simulated trading that investors use to practice mimicking trades (buys and sells) without actually entering into any monetary transactions." Paper trading can be used by traders irrespective of their level of experience. The neophytes can use this method to gain confidence and to gain familiarity with the trading mechanism. Professional traders who wish to try a new strategy are better off trying this strategy through paper trading. This will help in tweaking the target and stop loss percentages wherever required. Traders who wish to start trading in a new market (equity traders shifting to commodities, currencies etc.) could test the waters by simulated trading before actually beginning to trade there.

How long should a novice trader paper trade? A ball-park is three to four weeks. But it is better to extend the duration if sufficient comfort level has not been achieved. The trades should be recorded very meticulously during this period, as it would give you pointers towards when you are ready to jump off the cliff and take flight.

There is one pitfall in paper trading. The influx of emotions is minimal here as there is no money involved. This results in a high success ratio. This can in turn lead to over confidence and betting of large amounts in the first few weeks of actual trading. Being conscious of this danger will help in making the trader less exuberant on perusing the results of paper trading and will make him more wary in the initial period.

Lokeshwarri S.K.

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