Getting Started

One of the most commonly asked questions about paper trading is "How do I begin?"  Getting started is the hardest part, but once you commit to a routine it is a relatively easy process. Listed below is a step by step guide to start you on your way.

• Print off forms Trading Log & Trade Tracker
• Get a current set of charts
• Pick a market that you have an interest in
• Chart high, low and closing price daily
• Watch for an opportunity

When you have determined that there is an opportunity, the time has come to initiate your paper trade. Place a fictitious order to enter the market, long or short, which ever the case may be. Now you can do a couple of different ways.

After you have placed your order, check the prices daily.  If your price was hit during the days trading range you can assume that you where filled. If you choose to paper trade online you will be notified when your order is filled. Otherwise you will need to keep track of this on your own.  When trading a self-directed account the more you do by yourself while paper trading the easier real money trading will be. To make paper trading as realistic as possible call your paper trading broker and ask if he/she can give you an approximate fill on the order that you had placed. Once the order is filled, place the trade on your Trade Tracker.

Continue to chart the high, low, and close, this will let you know when to move stops or when it might be time to exit the trade. Log the closing price onto your trade tracker and calculate your profit or loss daily.  Calculating profit and loss is an area where some people run into a snag, but it’s really not that difficult. The most important thing to remember is that your account is balanced everyday, profits and losses do not accumulate.  This is how you do it, take your entry price and subtract today’s closing price, take your total and multiply times the point value of your specific contract, that’s all there is to it.  Continue do track your trade until you exit, then place the trade in your Trading Log.          Points vs Cents    Point Values

(entry price) - (closing price) x (point value) = P/L

Remember, paper trading is most successful when you treat your trades as if you had real money invested, be honest with yourself. If you’re only going to open your account with $2,500, don’t enter 10 contracts with no stop-loss that’s not realistic. Enter one or two contracts. Practice using and moving your stop loss to protect profits or limit your losses. This is your only opportunity to develop your trading plan without risking your trading capital. If the markets daily trading range touches your stop-loss price you can assume that you are out of the trade. Once the market trades at or through your stop-loss price your order becomes a market order and is filled immediately, for the purpose of paper trading you can assume that your orders are filled at or close to your price. That’s all there is to it, use your paper trading to try new things and develop your own strategies. Learn everything you can and tailor it to your personality, if you do that, trading should a be very enjoyable experience.

Basic tips-

When you’re studying the markets either through a course or the web, have a pen and pad handy and jot down any questions or notes you might have (try not to treat this as entertainment---practice active learning). You’ll also think of questions and ideas when you don’t have a book or computer in front of you, put those down on paper as soon as possible. It’s just like coworkers or family members to ask you to do or think about mundane things that will make your forget your train of thought. Inevitably once you’re on the phone you’ll forget something, so it’s best to have your notes with you when you call.

When you are dealing with a broker you should remember a couple of things-

Brokers triage calls. Basically, they assign an order of importance to each call. Highest importance go to clients getting in/out of the markets, the difference between a good fill and a bad one could occur in minutes or even seconds, timing is the key. The other two types would depend mostly on time, the shorter call will usually take precedence. The longer the conversation the more likely you will be placed on hold. We want to answer all of your questions, and give you as much of our time as possible.

When your paper trading with a broker understand that they don’t track your trades for you. It's always best to refresh our minds on the last conversation we had, it shouldn’t take but a couple of key points to get us in step with you.

To assist you in learning here are a few common terms: For a full list of terms click HERE

MARGIN

When you open a futures position, the margin is the amount of money held as a deposit, of good faith money for the performance of the contract. The margin also called "initial margin" is set by each individual exchange. Margin requirements are based on current market conditions and can be changed without notification.

LONG POSITION

In a long position you believe that the market is going to go higher. You buy a contract or "go long" at a specific price anticipating that the price will increase prior to delivery of the commodity. To exit your long position you must sell a contract. To make a profit the price that you sell your position for must be higher than the original purchase price of your long futures contract. Remember the old adage, Buy low—Sell high.

SHORT POSITION

In a short position you believe that the market is going to go lower. You sell a short position or "go short" at a specific price anticipating that the price will be lower prior to the delivery of the commodity. To exit your short contract, you must buy a contract. To make a profit, the price that you buy your contract at must be lower than what you originally sold it for. Sell high—Buy low.

The trick to understanding futures contracts is to realize that as a speculator you never intend to take physical possession of the product. You are simply transferring paper. Most people ask how can I sell something that I don’t own? It’s easy and believe me, it happens all of the time.

Whenever you buy something from a store that they don’t have in stock but have agreed to get for you, you are dealing in futures. The store agrees to sell a product that they don’t currently have, and you agree to buy the product for "future delivery". You have agreed on a selling price and a delivery date. Now think about it, the store technically went "short" or sold something that they did not have. You locked in the price you were willing to buy it for, and they locked in the price they were willing to sell it for. When you are going "short", you are taking the role of the store. The person you are selling it to becomes the customer. To fulfill the contract the store had to go out and purchase the item and give it to you. In the futures market, to exit your position you will have to do the same; you’ll have to buy the same commodity you sold. Since you are dealing only with the transfer of paper, that will fulfill your obligation. Physical delivery isn’t necessary.