Trading on Paper: Pluses and Minuses
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.
|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|