102-27 Stock Market Games & Simulations Pros & Cons

A stock market simulation is a computerized model of the stock market that allows users to test their investment strategies. The simulations can be used to assess the potential profitability of an investment and to determine the best time to buy or sell stocks.

There are a number of stock market simulations available online. Some of these simulations are free to use, while others require a subscription. The simulations vary in their complexity, but all of them provide users with the ability to test their investment strategies.

Stock Market Games

Imagine being in this situation. You are discussing the stock market with a group of people, and one person chimes into the conversation, stating they played a stock market game or “stock market simulation.” The conversation inevitably ends with this person explaining how they made hundreds of thousands of dollars playing trading stocks. It is nice to hear people explaining how they earned their untold fantasy riches in the stock market. Still, 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, you must understand the pros and cons of stock market games.

Course 102 - Stock Market Investing
Stock Market Games, Pros & Cons

Stock Market Games or Paper Trading, What are they?

Paper trading or stock market games refer to the same thing – the act of simulating trading for a period to practice and develop your investing skills. Stock Market Games have an advantage over simply paper trading because they will track your stocks automatically and provide you with a summary of profits/losses and other relevant details. However, both have some misleading consequences compared to trading real money.

The Benefits of Stock Market Games

There are some benefits to stock market games that will help beginners improve their skills. For example, learning the terminology of stock trade execution and performing executions can be achieved through stock market simulations.

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 upfront 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 your investments amongst different stocks

  • More stocks equal diversification but might lower overall returns.
  • Fewer stocks equal potentially more risk but more reward.

The Negatives of Stock Market Games

A sandbox environment for trading lets people get to grips with executing trades. Still, they lend little in education unless they are combined with an actual education course. Thus stock market games are 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 at a particular time and date. Imagine you choose to run a game for four weeks and that this four-week period coincides with a strong bull run on the markets. The only question for the game’s outcome would be who makes the most money.

Trading the stock market for real is different because there is no start or end date. Timing is critical in determining if you make a profit or loss in the long term.

Consequently, staying out of the market OR going short during periods when 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

Suppose the competitors have had no real education about stock selection/fundamentals or technical analysis before the trading game begins. In that case, the winner may be 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 decide to buy that stock based on any methodology other than his throwing arm’s muscle reflexes? No! Therefore, the results have little meaning. The author, by no means, condones or encourages monkeys and darts or any combination thereof for stock-picking strategies or 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. 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 market sentiment.
  • 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 market sentiment.
  • 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 into an explosive ball of flames. Cataclysmic is probably too strong a word; after all, there is no risk and no real money on the line, is there?

Fear and Greed Index Real-time Charts & Sentiment Indicators

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. Having a healthy attachment to your money means you will be attentive in checking your stocks, planning for future price moves, and, generally, devote enough time to managing your fund along the lines you choose.

Being overly emotional or emotionally attached to a particular stock can negatively affect your 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 laying your money on the line. We know that mastering your emotions is 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 you would be when trading. A whole different side to trading develops in your mind when you place that first real trade. Fear, greed, panic, and excitement exist only in the real trade and not in the stock market game.

9 Tips to Help You Beat Stock Market Games & Simulations

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.

Tip: Try Paper Trading & Test Your Skills With TradingView

TradingView
Connect with Traders

It would be best if you never used stock Market Games 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.
  2. Start Trading with real money but only a small amount at first – never more than you can afford to lose.
  3. Once you have a grasp of trading, work to define a system.
  4. Backtest the system – execute it.
  5. Continually improve the system.
  6. Continually educate yourself.

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

Section Summary

Now you understand the core concepts of trading in the stock market, you know it is important to understand what moves the stock market and assess market direction. You also understand the market breadth and market sentiment.

You also understand how many stocks you should own, how long you should hold a stock, and the advantages and disadvantages of stock market games.

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