Trading on Paper: Pluses and Minuses - dummies

Trading on Paper: Pluses and Minuses

By Joe Duarte

Masters of any craft practice constantly, and options traders are no different. Paper trading may seem boring, but it is an excellent way to work out a method of analysis, record keeping, and responding to the market. The goal is to train yourself to learn how to minimize losses as you develop new strategy mechanics and you make changes to your trading routine.

Watching a long out-of-the-money (OTM) option deflate in value as implied volatility drops is much less painful when it’s on paper. To be sure, it doesn’t really prepare you for the battle of greed and fear from within, but it forces you to address the situation prior to having money on the line. Some pluses and minuses for paper trading appear in the table.

Advantages and Disadvantages to Paper Trading
Advantages Disadvantages
Provides feedback via profits/losses Does not prepare you emotionally for losses
Allows you to incorporate all trade costs There are no assignments
Identifies issues you may not have considered Typically does not address potential margin problems
Avoids account losses Does not help trade execution understanding