Paper Trading Commodities - Good or Bad?

What is paper trading?

Paper trading is a process in which you make investment decisions without committing real money. You approach a paper trade just as you would a real trade, taking into account everything you would consider if you were making a real investment, and recording your investment decisions on paper. By looking at how your theoretical investments perform you can evaluate how well your investment approach is working, without the pressures of possible financial loss.

Why paper trade?

Paper trading gives you the opportunity to practise, and learn, without the danger of real losses. You can experiment with different trading approaches, and test and refine your trading strategies in practice before applying them in the market. You can observe how warrant prices move, and get a feel for the effects of time decay.

It is also easier for you to be objective in a simulated trading environment than in the real market. When you have real money at stake, emotional reactions can sometimes cloud your judgement. However, if you practise a detached and objective approach during the paper trading stage, you may increase your chances of using such an approach in real trading.

How to paper trade?

You should approach paper trading as realistically as possible. Just as you would if you were trading real money, you need to take into account:

• your financial resources
• the amount of time you can realistically dedicate to trading
• your desired exposure to risk

Having formed a view on the market, or a particular stock, you choose a warrant to buy that will reflect your view. You then theoretically ‘buy’ your warrants, and record the details of the trade, just as you would with a real trade.

On ‘selling’ your warrant, all details should again be recorded and the profit or loss from the trade calculated. If you are testing several different strategies simultaneously, the results from the strategies can be compared.

Your overall aim is to test the approaches to trading that you are considering. You should set out, in writing, one or more trading plans. The plan should include details such as:

• profit targets
• the degree of loss that will trigger an exit from your position, and
• other parameters that define your desired risk/reward profile

Each time you examine your position, ensure that the action you take is in accordance with your trading plan.

Well now the major issue. Is paper trading good or bad.

Well people have different views on this. Some say it is good because of the following reasons;

• Paper Trading is an excellent way to learn the mechanics of the commodity and futures markets.
• You get a good feel for how different commodities trade as well as calculating the profits and losses. This knowledge is very important for when you start trading real money.
• Paper Trading is also a helpful tool for when traders fall into a slump and they need re-organize their trading plan and work on new strategies.

Well Paper Trading id bad because of the following reasons:

• Many would-be commodity traders achieve hypothetical profits when they paper trade commodity futures. The reason for this is that they typically take a longer-term view and look for good opportunities.
• They usually give themselves liberal fills when they place trades, don't add commissions and sometimes throw out bad trades that they "really" wouldn't have placed.
• The most important difference is that there are no emotions involved in paper trading commodities.

If you take my words, I would say that paper trading is good, I started with this only and this helped me to gain insights about the market which were helpful in the long run. So I would advice you to go for Paper Trading.

Anybody has a different view or wants to add someting. Feel free to do so.