Option paper trading is a term used to describe how we would evaluate an option trading system without using real money. There are several major advantages from doing this.
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You are able to prove to yourself whether the system you’ve selected or been shown, is actually, a consistently profitable one. Furthermore, it allows you the means to tweak and refine the system and see the financial outcomes without any real exposure to risk. This can give you a belief in the system itself.
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The experience of option paper trading "trains" you the way to respond to unfavorable market situations. A component of any worthwhile options trading system is the assumption that a percentage of trades will likely be losing ones. You’ll need to be psychologically prepared for this. If a predetermined stop loss is part of your system you will need practice in accepting losses before you work with your own capital.
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The best options traders claim that 90 percent of successful trading is about psychology. You must have the right mindset when making trading decisions. For those who assume the mindset of a gambler, you will know the pain of gambling losses. It is crucial you approach your trading with the mindset of a serious entrepreneur. On a daily basis you will make business decisions based on strict criteria. You will have to be patient and wait for the best setups and confirmation signals so that you don’t make the mistake of attempting to anticipate the market before it shows you where it’s going.
You will have to practice the way you manage your trading capital and use position sizing in a methodical way so you don’t risk too much of your money on any one trade. You may need to make some blunders of this type and "feel" the consequences of greed or needless risk. Option paper trading is not merely about how to identify trading opportunities, but also about mastering the self discipline that’s so necessary in order to succeed.
Where and how to Paper Trade
The preferred options brokers like TradeKing, OptionsXpress and ThinkorSwim, include an attractive feature which allows you to paper trade without using real money. They provide you a "Virtual Trading" tool, where live options prices are applied to live stock prices and you can try out your trading strategies without risking real money. But the rest is real, including trading reports which keep track of all your deals and brokerage costs, so that you can see what your profit or loss would have been, had you been trading with your own personal funds.
Simply add an imaginary sum of money to start with and then proceed with implementing your trading plan. This is an excellent way to gain real confidence that you can actually earn a living trading options.
One final thought. Option paper trading must be taken seriously for it to be truly effective. A casual approach which neglects to monitor your trades or enters questionable positions knowing that you can’t really lose, is a dangerous psychology. Believe me, when you graduate to using real money, everything will change at an emotional level … so to make use of it as a serious training ground and you will be rewarded.
