Trading Educators Blog
Paper trading cannot replace real trading for many (mainly emotionally based) reasons, but it can be an important part of the process of finding and trading a new method. First you might have an idea about how to trade a market based on price bars, candlestick charts, indicators, or whatever you use for your trading. Next you would back test it with older data. You would do it manually or by using a back testing software. After being satisfied with your back testing, you could start to do some paper trading. Many trading ideas or methods seem to work pretty well during back testing, but cannot make any money in the "real world of trading". Paper trading can definitely help to find the weakness of any method, but you should take the paper trading seriously. Only if you are satisfied with the paper trading results should you start trading your method with real money. Start with very low risk to see how your method performs with the reality of actual money on the line. Then, if it seems to perform well during trading it for a while with only low risk, you can increase your risk based on your money management. By the way, you should go through this paper trading process with every new method you want to trade, no matter whether it is your own method or a method you have just bought!