The Benefits of Paper Trading Futures and Commodities

Think of paper trading as a simulation of the real thing

Stock prices at the Chicago Mercantile Exchange
Alan Schein Photography/Corbis/Getty Images

Paper trading the commodities and futures markets might be one of the best ways to get trading experience without putting any of your money at risk. Most new traders struggle when they first venture into the world of trading commodities, so it only makes sense to give your trading skills a trial run first to determine whether you're ready to trade when you have actual money on the line.

What Is Paper Trading?

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

The only difference is that you're not putting your cash at risk. As the name suggests, you only write the buy and sell orders down on a piece of paper and track how well you would have done if you were actually trading with real money. Of course, you can keep a running spreadsheet on your computer if you prefer.

Think of paper trading as a simulator. It's used as a training tool, just like pilots learn to fly on simulators before they actually take to the air in a real plane with passengers at risk.

How to Begin 

You should already have a detailed trading plan put together that outlines your entire trading strategy before you begin paper trading. If you don't, do some research, learn as much as you can about trading, and then devise a plan with your particular goals in mind. 

Next you'll make note of what your entry point would be if you placed a buy order. When the market hits that price, you should consider it a filled order.

From that point, you should have your stop-loss order in the market and a good idea of where or how you want to exit the market. These orders should be written down to keep yourself honest. When your exit is hit, you'll record the profit or loss you made on the trade. After a series of trades, you'll begin to see how well you might have done if you were actually placing real trades with a commodity broker.

The Pros and Cons of Paper Trading

There's a difference of opinion among many experienced traders as to whether paper trading is useful. Some say that it's not completely realistic because you don’t have any money at risk. It's a different ballgame when you're making actual trades because emotions can 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 an opportunity to get familiar with trading and see if you're on the right track before you jump in with both feet. It lets you make adjustments to your trading plan before you put money at risk. Many traders often go back to paper trading as a way to get back on track when they're struggling. Overall, it is not the complete experience, but it is an excellent training tool and it's almost a necessity before you put your money at risk trading commodities.