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Setting Up a Paper Trading Account

Question:
I cannot trade with "real money" as yet; however, how do I go about setting up a paper trade account?

Answer:
You can paper trade various ways and it really does not require that you have anything more specialized than a notebook to track your trades and access to charts.

Begin by funding your paper trading account with the amount of money you think you will really begin with, whether it is $2000 or $20,000. I would suggest you limit your scope to about 6 - 8 markets, as these will be enough to track on a daily basis.

Even real money traders rarely follow more than 8 markets...it just becomes too cumbersome, as I'm sure you will find when you've got more than one paper trade going at a time.

If you don't know which markets to choose from, maybe I could make a couple of suggestions:

* Corn, or wheat - these are good markets for traders of all levels, but especially the beginner. They are just too thin and too volatile for the small trader to be involved in.

Now that you have a paper account and a mix of markets to trade you need to search the markets to find trades to make. This is great if you want to trade the e-mini, or if you are trading with a $50,000 account, but this is not the case for most traders.

Anyway, that's paper trading in a nutshell.

Setting Up a Paper Trading Account

Question:
I cannot trade with "real money" as yet; however, how do I go through setting up a paper trade account?

Answer:
You can paper trade various ways and it really does not require that you have more specialized than a notebook to track your trades and colonnade to charts.

Begin by funding your paper trading hold with the quantity of money you think you will really set in with, whether it is $2000 or $20,000. I would suggest that you arise with no less than $5000 and $10,000 is even better.

Next you need to decide on which markets you are going to trade. The more money you have in your account, the more markets will be close by to you. If you are trading with a $5000 the dope there is no point in fair familiar with a market like Crude Oil that has a margin of $3000 per contract!

Assuming that you are a smaller trader, you will be most interested in the lower margin markets like the grains, some of the meats, maybe a metal and a currency or two. I would suggest you limit your scope to randomly 6 - 8 markets, as these will be enough to track on a daily basis.

Even real money traders rarely follow more than 8 markets...it just becomes too cumbersome, as I'm sure you will find when you've got more than one paper trade going at a time.

If you don't know which markets to wish to goodness from, maybe I could make a couple of suggestions:

* Corn, or wheat - these are good markets for traders of all levels, but especially the beginner. The margin is not too high and the markets normally act predictably and trend well. Corn and wheat have a tendency to move together (but not always), so watching both can be redundant.

* fawn - a good market to make money in as a small move can add up to good profits. Also can be a good market to lose money in for the same reason. I don't mind cocoa, in any case I know people who have sworn it off. This is the time to find out if it is for you...when it doesn't cost you real money.

* Sugar – used to be a good market as long as it is easy to get in with minimal risk; however the surplus of support and resistance can make it confusing to new traders. Lately the market has lacked direction which only adds to the confusion. Still it is low margin and relatively low risk market to trade.

* Live steer - a decent meat market. Some new traders give place to the meats entirely in that of their artfulness to make huge ranges. calf is the "safest" of the meat markets.

* Cotton - can be a good market, but is inclined to of making large ranges. I used to be stuck-up cotton like the plague, but have arise fonder of it in recent years.

* Soybeans - the Pork Bellies of the Grain complex. If soybeans are too volatile for you consider trading one of the bean cousins, like soybean oil, or soybean meal. They tend to mirror soybeans, but are generally less margin and less volatile.

* Silver - I like the metals; however gold can be a little rich for the small trader. Silver mirrors gold - the poor man's gold. Some people like copper, but I consider it too thin and margins too high for small traders.

* Canadian Dollar/Australian Dollar - two of the more reasonable currency markets. The margins are lower, but there is excellent money making potential. Other markets like Swiss Franc, British Pound, and Japanese Yen are good markets too but require much more margin and risk. All the currencies have a tendency to move in the same direction in any case (opposite the US Dollar) so it doesn't really matter.

But don’t stop here, this is the time to practice and refine your skills so include any other markets you are interested in, but shrink the exotics like lumber, rice, oats, palladium, etc. They are just too thin and too volatile for the small trader to be involved in.

Now that you have a paper blood money and a mix of markets to trade you need to search the markets to find trades to make. Once you have found a trade you like, write down your entry, your exit and your profit target - exactly.

If you are dealing with a broker, you can call and ask them if your paper order had been filled on a particular day. Alternatively you can just look at the charts and figure it out for yourself.

Sometimes you will need to see an intraday rough to know exactly when you got your fill. Barcharts.com offer free intraday charts. Just follow the item profile link and then be successful custom charts to chop the time frame displayed to a 5 or 10 minute interval.

Track your trades day by day keeping a journal of your profits and losses. A simple way to “journal” your trades is to put them on 3x5 index pack – one card per trade. Write down you reasons for taking the trade as well as exact entry and exits. Make sure to note what you did right and what you would do differently the next time. consent an extra two ticks on your fills and exits as this will simulate slippage. jobbing fees are usually $40 round turn per contract.

See how well you can do but be honest. delusion here will not help you in the future. I'm sure you've heard it before, but nothing changes when you trade with real money. If you can't do it on paper, you won't make it for real. Trust me. I've been there.

If you don't yet have it, you might want to consider using Gecko's Track 'n Trade Pro. As the name suggests the software not only provides charts but also "tracks your trades". You fund a fictional account, place your orders and the software will rote update your position day by day.

It really is phenomenal software and if you are halfway serious everywhere trading you should stand it out. It is a legitimate tax deduction too. ;-) You can get a free 30 day trial by following this link: http://www.trackntrade.com/demo/?abbr=SENFT

There is also paper trading software out there and on the internet which is supposed to simulate trading; however in my opinion it is not realistic for most small traders.

Some of the simulators only tender you to trade the e-mini and others start you out with a $50,000 account. This is great if you want to trade the e-mini, or if you are trading with a $50,000 account, but this is not the case for most traders.

Anyway, that's paper trading in a nutshell. I hope it helps a little. Please do not hesitate to write back if you have more questions, of if you need me to elaborate on something.

Best of luck,
- Erich
erich@supportandresistance.com

PS. Don't skip this part of your education. Most traders hurry through paper trading only to get killed in the markets. Don't make this mistake.

U.S. Government Required Disclaimer - article Futures Trading ration Futures and Options trading has large potential rewards, but also large potential risk. You must be heedful of the risks and be willing to keep in countenance them in order to invest in the futures and options markets. Don't trade with money you can't slip to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is hand made that any face will or is likely to cause profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.

CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE stated LIMITATIONS. UNLIKE AN incontrovertible PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT phenomenal TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF faithful MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE grace OF HINDSIGHT. NO REPRESENTATION IS nature MADE THAT ANY sales account WILL OR IS LIKELY TO cause PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.

My latest net-net article over at GuruFocus includes my clearest explanation of what to look for in net-nets – and more importantly – what it takes to make money investing in net-nets:

If the balance sheet is very liquid and insider ownership is very high – there’s a good chance something will happen. I have no idea what. And I have no idea when. But someday, something will happen to increase the return on those assets…Sometimes it’s as simple as returning the assets to shareholders, using net cash to make a management buyout super cheap, or using net cash to buy a totally different business…When you buy a net-net you are not buying future earnings. You are buying future assets. What I’m talking about here is asset conversion. At some point, you are expecting today’s assets will be converted into something you can profit from. Something a control investor will pay for. Or something the market will reward. 

It’s very hard to imagine these events ahead of time. But you can still bet on them:

That’s the uncertainty in net-nets. Most of the best net-nets have this certain/uncertain duality. It is certain the stock is selling for less than it’s worth. It is uncertain how the stock will ever sell for what it’s worth.

Remember what Ben Graham told the U.S. Senate:

The Chairman: When you find a special situation and you decide, just for illustration, that you can buy for 10 and it is worth 30, and you take a position, and then you cannot realize it until a lot of other people decide it is worth 30, how is that process brought about – by advertising or what happens?

Mr. Graham: That is one of the mysteries of our business, and it is a mystery to me as well as to everybody else. We know from experience that eventually the market catches up with value. It realizes it one way or another.

Talk to Geoff about Faith in Net-Nets

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