Simulation Trading Definition
Simulation trading is the act of trading stocks in real-time or delayed with fictitious or paper money. Simulation trading is helpful for testing out trading methodologies, but is most helpful for assessing a day trading system. Simulated trading is one of the first steps a day trader will take on their long journey to becoming a master trader.
Just 15 years ago, there were no real-time trading simulators available to the public at large. Active traders could not work from home, since the internet was not widely available. Practice or simulation trading was only possible for swing or position trading. In today's trading world a number of direct access brokers offer real-time simulation trading. These simulators factor in trading volume and the number of shares exchanged at the bid/ask level, so the trades simulate actual trading as close as possible.
Day trading in a simulator will seem easy. After you get beyond the point of making "bonehead" trades, the market will begin to reveal itself to you. You will find yourself being more selective and patient in your trading. At the end of the month your day trading results will tell you its time to begin live trading.
Reality Sinks In
Now that you've put on a number of day trades in the simulator, it is time to put up your own money. This is when reality slaps you right in the face. That slight pullback that you set through 20 times on your way to big gains, now causes you to exit winning positions to soon. Within two weeks, you will find yourself guessing your system if not outright trading completely differently.
In summary simulation trading has been a great advancement for day traders across the globe. It can become harmful when traders begin to find a false since of security when "paper trading". Day traders should use simulators to test out new ideas, but realize that results should be decreased by 30% to take in account for slippage and poor decisions that come from trading with real money.