By Richard L. Muehlberg*
Posted: Oct 24, 2008

On June 10, 2008, I opened a simulated futures account. My starting total was $50,000. Twenty-three trading days later, on July 11, my total reached $158,404. If you would like a JPEG copy of my July 11 statement, I will email it to you.

I opened the account because these words kept coming into my mind: "If you are a bad trader, why aren’t you a good trader? If you are a good trader, why aren’t you a better trader? If you are a better trader, why stop there?"

For years, I had been toying with the idea of opening a simulated ("paper trading") account. On the one hand, I felt that opening a paper trading account was something I should do. On the other hand, I was not convinced. Because I was actively trading, I did not see the point in opening a paper account while my real accounts were keeping me busy enough. But, those words "If you are..." kept coming back to me.

Then, on June 10, I made the move. I accepted that it was okay to have a paper account and real accounts at the same time. The idea of training is familiar to me. I keep a trading diary as a training tool. I study the diary to help me trade. I reasoned that trading money in a paper account would be another training tool. I would be able to compare what I was doing in my real accounts against my paper account.

I knew that the "fear factor" would be different with a paper trading account; you do things with simulated money that you might not do with real money; you might trade the way you are supposed to without letting emotions / fear overrule you. What I did not expect but soon realized was how seriously I would take my new paper account. The simulated money took on its own reality.

Now, when I read an article saying paper trading is a waste of time I wonder if the person who wrote the article has any direct experience with paper trading.

If you are new to trading and want to explore how trading feels, I recommend opening a paper trading account. Do a web search using the keywords "simulated trading account + paper trading account + stocks + futures" or some combination of those keywords. Create a short list of the websites that appeal to you. Some paper accounts are free. Some cost a small fee.

One alternative is to open a single account. Another alternative is to open two (or more) accounts through separate sites. Use one account to test one trading approach and the second account to test another.

Even if you are an active trader, I still recommend a paper trading account. Trade the account alongside your real accounts. You may be surprised by how mentally reinforcing the experience can be. Sometimes, you need to learn things by having someone else teach you. Sometimes, you need to learn things by having yourself teach you. Using a paper account, where the pressures are different from what they are with your real accounts, may help you show yourself just how much better you can become as a trader.

So how did I triple my paper trading account?

I followed the same trading approach I follow with my real accounts. (I am a day trader as a rule. My approach is to follow a consistent group of futures and ETFs and attempt to day trade no more than one or two of those futures or ETFs at a time.) I traded when I saw a low risk / high reward situation. Each day, when I made what I felt was enough money for one day, I stopped trading for that day. I did not let myself become overconfident.

At the end of each day, I looked over the trades in my simulated account and remembered why and how I made each one, just as I do with trades in my real accounts.

Paper trading is helping me in a lot of ways, but most especially with my discipline. If my answer seems too easy, then open a paper trading account and see first-hand what is possible.

Gold, 11-Day Chart, eSignal

Look at this linear regression intraday 11-day chart for August 2008 gold futures. The price bars are 180 minutes. See the action on July 10 and July 11? Would you have had the nerve to ride those two days on the long side using your real accounts? Would a paper account have helped? What if you had used both accounts? Do the math. Imagine just a $30,000 paper account on the long side of the July 10 / 11 move.

Look at your own charts tonight. Review the trades you wish you had made. Ask yourself if you might have made those trades if you had had a paper account. If the answer is yes, then open your own paper account. Next time you see a trade you want to make but don’t want to risk with your real accounts, use your paper account. Get some part of you in the game. Build yourself up in steps.

If you are experiencing a winning streak in your real accounts, then shift most of your trading to your paper account; let it absorb some of the "emotional high" that comes with winning. The "high" of winning can lead to overconfidence and recklessness. Your paper account can help protect you.

If you are experiencing a losing streak in your real accounts, then restrict yourself to your paper account. Once again, your paper account can help protect you. Get your rhythm back. When you are "back in the zone", start trading small in your real accounts; then, gradually increase the size of your real positions.

A trader is an athlete; you never lose the need to train, no matter how good you get. Trading is a competition. You are competing against other traders. You win money from them. When you lose, they win money from you. An athlete who does not train gets outclassed.

What do you think happens to traders who don't train? A trading diary can help you train. A paper account can help you train. Become that better trader.

*Reprinted (and modified) with permission from Richard L. Muehlberg (richardmue@yahoo.com, a contributor to Futures magazine and an active day trader of his own account using linear regression channels and intermarket analysis. His daily trading diary entries are available on www.DayTradingWithLinesInTheSky.com. Also, see his January 25, 2008 eSignal Weekly Trading Education article, "Is the Advice to Keep a Trading Diary Good or Bad", and his February 15, 2008 article, "What Is the Goal of Trading?"