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Paper Trading Futures

Updated on May 17, 2010

Paper Trading Futures

I highly recommend paper trading futures contracts before even thinking about stepping into the arena of futures trading with real money. For those who may not be too familiar with the term “paper trading”, a very basic definition is that you are “pretend trading” the futures markets by selecting a futures contract, watching the market action of that contract, determining an entry price at which you will pretend to enter the market, and then tracking your trade every day based on real-life market movements, until you arrive at your profit target (or loss threshold). The whole purpose of paper trading futures is so you can get used to what it’s like to be in the market, with active open trades, without putting any real money on the line. One of the biggest mistakes that novice traders make is that they start trading with real money too early. I’m not even exaggerating when I say that if I could do it all over again, I would have spent probably a year just paper trading the futures markets, so that I could get a very solid grasp of how the market responds to the different rallies and fallouts that happen based on different news items, supply and demand issues with the different commodities, and so forth. Although I am a firm believer in trading by price charts, you would be an idiot to think that market movements are not largely based on people’s perception of the fundamental data for a particular commodity. But before I drift too far off-topic on that point, I want to get back to the main point of this hub, which is to explain what paper trading futures is all about, and why it is beneficial to your overall development as a futures or commodities trader. Paper trading will help you tremendously as far as getting a feel for a market before actually diving into that market with real money. The main thing that I believe you’ll take away from paper trading futures will be that you’ll learn about yourself more than anything else, and how you respond to the market’s sometimes unpredictable ways.

Image courtesy of Google Images
Image courtesy of Google Images

Paper Trading Futures Contracts

The actual “how-to” of paper trading is not very difficult; what I normally do is browse through the different commodity charts that are available through such sites as barchart.com or futuresource.com, and then I select a futures contract based on how the price chart looks. If I see what I believe to be a potential market move in a given commodity, I will take note of what that commodity is, its symbol, and also what contract month I’ll be trading. Remember, there’s a big difference between trading December Corn and May Corn, and it’s all based on how close to the actual month that contract is. For instance, if it’s mid-March, and I’m trading May Wheat, the market movements may be a little more pronounced than if I would have been trading September Wheat, due to really nothing more than the fact that May is not as far away from March as September is. You’ll find the closer to “real time” your commodity contract is, the more volatile it will be, while the farther-out months have generally a little more stability. You’ll also often find that a violent move in the front-month commodity (the one closest to “real-time” will not be as pronounced in the subsequent months, and usually the movements are less and less pronounced the farther out in time you go with contract months. This is something you’ll notice as you paper trade, and this is something that spread traders use to their advantage; they’ll buy a July Corn contract for example, and sell a September Corn contract, hoping to take advantage of the price disparities that can happen between contracts, even though it’s the same commodity they’re trading in both cases. But anyway, once I have selected which futures contract I’m going to trade, I’ll pick an entry price based on real-time market movements, and then track my trade from the time I “enter” the market until I hit my profit target, or again, my loss threshold. I normally record each day’s open profits or losses, and I like to also keep notes of my thoughts about the trade while I’m in it. My paper trading notebooks have become “journals” of a sort, and through keeping a written record of my thoughts I have discovered that the psychology behind trading is just as important as the actual mechanics of the trade. So again, my encouragement to anyone looking to trade commodities or futures contracts with real money, you may want to paper trade futures before putting real money on the line…your trading account will more than likely thank you down the road.

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