The Benefits of Paper Trading Futures and Commodities

Stock prices at the Chicago Mercantile Exchange
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Paper trading the commodities and futures markets may be one of the best ways to get trading experience without putting any money at risk. There is no doubt that most new traders struggle when they first venture into the world of trading commodities, so it makes sense to give your trading skills a trial run to see if you are ready to trade with actual money on the line.

What is Paper Trading?

Paper trading is simply a process of taking hypothetical trades as if you were actually trading real money.

The only difference is that you are not putting your money at risk. With paper trading, you only write the buy and sell orders down on paper and track how well you would have actually done if your were trading for real.

Think of paper trading as a simulator. It is used as a training tool, just like pilots learn to fly on a simulator before they actually fly a real plane…with passengers at risk. To begin paper trading, you should already have a detailed trading plan put together that outlines your entire trading strategy. Then, you will write down your entry point if you place a buy order and when the market hits that price, you should consider that a filled order.

From that point, you should have your stop loss order in the market and a good idea where or how you want to exit the market. These orders should also be written down to keep yourself honest. When your exit is hit, you will record the profit or loss obtained on the trade.

After a series of trades, you will begin to see how well you might have done if you were actually placing real trades with a commodity broker.

Pros and Cons of Paper Trading

There is a difference of opinion among many experienced traders on whether paper trading is useful or not. Some will say that it is not completely realistic since you don’t have any money at risk.

And once your money is at risk it is a different ball game. Emotions cloud judgment, as fear and greed become your enemies. These points are valid, but the benefits of paper trading outweigh these issues.

Paper trading offers you the opportunity to get familiar with trading and to see if you are on the right track. It also allows you the opportunity to make adjustments to your trading plan before you put money at risk. Many traders often go back to paper trading when they are struggling as a way to get back on track. Overall, it is not the complete experience, but it is an excellent training tool and almost a necessity before you put your money at risk trading commodities.