Nearly anyone who has ever traded with the intent of creating or testing a trading strategy or trading plan has attempted to test that strategy in real time. Backtesting is nice, but its not real and its not done during market hours with live trading. To test your strategy without money is called paper trading. Traders utilize paper trading to hone and nail down the exact method that will make them turn profitable. With any strategy comes loss, its the winning strategies that win more percentage wise per trade than the ones that don’t. You don’t have to win more trades, its about winning more money per trade over losing trades that makes you have a winning strategy.
Paper trading allows you to practice your trading without risking any money/capital. Nearly every binary options broker allows this when you sign up. Its called a demo account, but is often referred to as a practice account. This type of account allows you to practice trading in real time during market hours.
Getting into what strategy is appropriate is up to you. You can trade technically, instinctively, or algorhythmic/system based. Technical trading involves technical chart pattern trading. You look for certain patterns in the charts that tend to lead to profitable outcomes.
Technical Example of AIG On 5 Minute Chart
If your strategy involved buying resistance breakouts, this chart shows the gap up over horizontal resistance a clear buy signal. You would buy calls in AIG and in this chart you can see you would be right.
Technical traders use these defined patterns and often involve utilizing support and resistance, trendlines, trends, breakouts and breakdowns.
Instinctive trading also can be interpreted as tape reading. This is where the trader uses their gut feeling based on what they see happening in the market and make a split second decision. Instictive traders are ethereal and use all kinds of senses typically watching everyone around them, utilizing Level 2, and order flow to make trade decisions.
Algorhythmic or System traders take trades based certain perameters that repeat over and over again. When that condition occurs, the Algo trader executes a trade.
A Paper Trading Example
If you thought this asset will go higher, then you assume a breakout trade above the price level. If so, then you would buy Calls hoping that your strategy is right and the asset ends higher at expiration.
The main idea in paper trading is to prove your idea is successful. If the trading strategy is successful, it gives you confidence. With trading real money, confidence is everything. You cannot be emotional or it will effect your next trade. Paper trading gives you trading confidence.
Paper Trading Is Recommended
Paper trading is something any trader should do at least once in their trading career. It is a key component to understanding how to trade and how to go through the mechanics of trading in both losing periods and winning periods. The more experience you have trading the better you will trade. Being able to trade without risking any capital is just icing on the cake.