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The following guest post is courtesy of Lawrence Richardson II, CEO and Co-Founder of ZeroSum Markets.
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Almost every Forex broker out there offers you the opportunity to paper trade an account. I’m telling you not to. Even if you start small and trade with real money, losing all of it, it will save you more in the long run. Why? Because, trading simulators establish poor trading habits.
Maybe 1 out of a 100 people can effectively use a simulator to establish good trading habits. Odds are that isn’t you.
Okay, let’s go over why you shouldn’t use a simulator.
1. You don’t feel the pain of losing money.
Losing money is a good thing for new traders, it shows that you are not invulnerable in the markets. Now I’m not talking about blowing out your account but having proportional losses to your account size reminds you that markets are tough.
2. You are accustomed to trading larger amounts than your normal account.
Trading larger amounts in a simulated environment will make trading larger amounts in your real money account psychologically easier. Even if you keep good money management guidelines you will be tempted after your first big loss to chase it with a larger trade. This is made easier from your previous trading on simulated accounts even if you aren’t aware of it.
3. You are more likely to over-trade.
Simulated trading offers spreads to mimic real world trading but often at reduced spreads. A trader can be profitable at a .5 pip spread but get eaten alive using the same strategy at a 1.3 pip spread. Simulators make over trading easy.
Ask yourself, why brokers want you to use a simulator? Brokers make money when you trade and by creating poor habits in their customer base they can generate more trading profits off of your bad behaviors.
Making Simulators Better
How can simulators be made more effective? Trading is almost meaningless without risk attached to it. Anytime you eliminate risk from an activity you create perverse incentives that create undesirable outcomes.
The risk of loss keeps us focused and in the moment. But this necessary loss has to be balanced against traditional psychology. Put simply as much as we are reluctant to admit it the majority of traders let loser’s run and cut winners short. Having a positive trade winning percentage isn’t enough, magnitudes of your wins and losses matter much more. This isn’t anything new but needs to be said over and over.
Good luck finding the right trading simulator for you. We think we built a great alternative to your traditional options. Check us out at ZeroSumMarkets.com.