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How Trading Using Fake Money Can Increase Your Trading IQ and Save You Tons of Money
26 Mar 2017
Beginner traders tend to overestimate their aptitude for stock trading and this might lead to them losing lots of money. The fundamental mistakes they make can easily be avoided if they took the time to learn the game and master the basics.
If you are just starting out, technology now allows you the opportunity to execute trades and learn the basics with absolutely no risk. With fake money, you can gauge your strengths and weaknesses and learn valuable lessons that will help you a great deal when you begin trading with real money.
To find success in the stock market, you want to minimize the number of bad decisions you make. By reducing unforced errors, you limit your losses and give yourself a chance to succeed. Some of the mistakes you will be learning to avoid by practicing with fake money include:
Overweighting the Importance of Past Performance
Where a given stock or asset class has historically performed well, a beginner may feel that they are losing out and invest hoping that the good run will continue into the future. The problem with this kind of thinking is the fact that a stock having performed well in the past does not necessarily mean that the good streak will continue into the future. Trading with fake money will help you learn when it is and when it isn’t a good idea to chase such runs.
Not Knowing When to Cut Your Losses
Appreciating that you are not some otherworldly genius whose trades will all be winners can be a great asset. It is just as important to know when to cut your losses and move on as it is to know what kind of stocks to buy. Inexperience can result in one holding onto a losing position far longer than is necessary. As usual, your goal with every trade is to protect your downside as much as possible and let your upside run wild.
Managing Emotions and Expectations
Warren Buffett says that one of things that make a great investor is rationality. You want to be a rational trader and not let your emotions influence your decision making. Taming fear and greed will result in you making far better decisions. As you learn the ropes with fake money, you’ll quickly learn the value of being rational and that greed and fear can cost you tons of money.
Not Taking Market Research Seriously
The stocks you will be trading are backed by real world companies. It is can be really valuable to learn how to do fundamental and technical analyses so you deeply understand the companies you are investing in. As you trade using fake money, you will quickly learn what information to pay attention to and what to disregard.
Going the Fake Money Route
Finding an online investment portal that will allow you to trade with fake money is as simple as doing a Google search. You can sign up with a reputable online stock broker with demo accounts that use fake money.
When you start, the first thing you will learn is that you don’t know much. Beginners tend to overestimate what their innate abilities can let them achieve in the stock game. Learning how to manage your expectations is actually a skill. As a beginner, having lots of ETFs on your screen when you don’t know what to do with them can be paralyzing. It’s a good thing you will learn this lesson with fake money instead of your hard earned dollars.
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