I bet you have been in this situation, I sure have.  You are discussing the stock market with a group of people and one person chimes in to the conversation stating they played a stock market games or “stock market simulation”.  The conversation inevitably ends with this person explaining how they made hundreds of thousands of dollars play trading stocks.  It is nice to hear people explaining how they earned their untold fantasy riches in the stock market, but unfortunately it hides the actual underlying false premises of stock market games.

If you are new to the stock market or have been trading for a while, it is important that you understand the pros and cons of stock market games.

Stock Market Games or Paper Trading – What are they?

The term paper trading or stock market games I believe refers to the same thing.  The act of simulating trading for a period of time in order to practice and develop your skills.  Stock Market Games have an advantage over simply paper trading because they will track your stocks automatically and provide you a summary of profits / losses and other relevant details.  However both have some misleading consequences when compared to actually trading real money.

The Benefits of Stock Market Games

There are some benefits to stock market games which will help the beginner improve their skills.

Understanding Terminology:

• Stock Price – getting used to the meaning of Stock Price – Open / High/ Low / Close / Last
• Stock Entry Strategies – implementing Market Orders / Limit Orders
• Stop Loss Strategies – implementing different stop loss mechanisms to allow you to experiment with Stop Limit Orders / Stop Market Orders / Trailing Stops

Execution of Stock Orders & Automation of Orders

Using  and understanding order execution logic enables you to up front implement your buying logic for later automatic execution using approaches such as:

• One Cancels Another (OCA)
• One Triggers a One Cancels Another (OT/OCA)
• One Triggers Another (OTA)
• One Triggers Two (OTT)

Practicing Portfolio Management – how to distribute you investments amongst different stocks

• More stocks equals diversification but might lower overall returns
• Less stocks equals potentially more risk but more reward.

The Negatives of Stock Market Games

While I believe a sandbox environment for trading enables people to get to grips with executing trades I think they lend little in terms of education, unless they are combined with an actual education course.  The Stock Market Games are simply a practical alternative to learning how to execute trades.  But learning to make wise investment decisions is a completely different ball game.

The Timing Effect

A stock market game will start and end on a particular time and date.  Imagine you choose to run a game for 4 weeks and that 4 weeks happens to coincide with a strong bull run on the markets.  The only question for the outcome of the game would be who makes the most money.  Trading the stock market for real is totally different because there is no start date or end date. In fact timing is a critical factor in determining if you make a profit or loss in the long term.  Consequently staying out of the market OR going short during periods in which the market is declining is just as important as going long when the market is improving.  This is not considered in paper trading or stock market games.

The Randomness of Winning

If the competitors have had no real education about stock selection / fundamentals or technical analysis before the trading game begins then essentially the winner may end up being randomly chosen by market fluctuations because the trading choices are uneducated.  For example if you put ten monkeys in a room, and ask them to throw darts at a page of the Financial Times, and then place the trades where the darts hit, then one monkey will win.  Does that make this monkey a good stock investor?  Did that monkey consciously make a decision to buy that stock based on any kind of methodology other that his throwing arm’s muscle reflexes? No!  Therefore the results have little meaning.  The author by no means condones or encourages the use of monkeys and darts or any combination thereof, for stock picking strategies or indeed any purposes 

The “No Risk” Effect

If you are paper trading you are not “putting your money where your mouth is” or in effect taking any risk at all.  So if you wanted to win a Stock Market Game or even a Trading Competition where you are paper trading rather than trading real money, then your very best option for gaining a place on the winning podium is to do the following.

• Choose the most volatile stock
• Estimate where you believe the stock market direction is heading and what the market sentiment is.
• Place as much money as possible on the volatile stock by buying as much leverage (Margin) as possible
• Hope the stock moves in your direction

OR

• Choose the most volatile stock
• Estimate where you believe the stock market direction is heading and what the market sentiment is.
• Using Options to  leverage the trade (buying a Call or selling a Put for the stock to go up / or buying a Put or selling a Call for the stock to go down)
• Hope the stock moves in your direction

You will either get on the podium, or crash out in a cataclysmic ball of flames.  Well, cataclysmic is probably too strong a word, after all, there is no risk and no real money on the line, is there?

The Emotional Effect

Trading stocks for real means you get emotionally involved with what you are doing.  Emotions are not always negative in the stock market.  In fact having a healthy attachment to your money, means you will be attentive in checking your stocks, planning for future price moves and in general devote enough time to managing your fund along the lines you choose.  Being overly emotional or emotionally attached to a particular stock can also have negative effects which may lead to you making irrational decisions.  Whichever way you look at it emotions play a part in stock market investing.  The only thing that creates emotions in the stock market is actually laying your money on the line. We know that mastering your emotions are one of the criteria for being a successful trader, so paper trading does not bring out that emotion or encourage you to be as diligent as your would be when actually trading.  A whole different side to trading develops in your mind as soon as you place that first real trade.  Fear, greed, panic and excitement exist only in the real trade and not in the stock market game.

Stock Market Games – Good or Bad?

So, we know stock market games can be good for helping us to understand the terminology and the execution side of stock market investing, but there are also downsides.

Stock Market Games should never be used by you to convince yourself that:

• You have a great approach to the market
• You are an expert trader
• Your education is complete
• You will make any money in the stock market for real

The Best Approach.

I would seriously recommend the following course of action for you to take before investing in the stock market.

1. Get Educated – with a professional stock market education – of course I would say that eh !
2. Attend a workshop / seminar to help round off your education – workshops and seminars are included in the Liberated Stock Trader PRO Stock Market Training
3. Find a mentor to help you refine your approach
4. Start Trading with real money but only a small amount at first – never more than you can afford to lose.
5. Once you have a grasp of trading, work to define a system
6. Back test the system – execute it
7. Continually improve the system
8. Continually educate yourself.

Successful stock traders all have one thing in common, they develop a winning system based on their knowledge and they test and execute the system.  They then seek to continually improve it.  They do not trade like dart throwing monkeys and neither should you.