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We day traders are an impatient lot. After all, most investors and fund managers would pump their fists in ecstasy if their stock gained 50% in a year. Day traders are accustomed to seeing stocks move 50% in minutes.
The problem is that the impatience for action and results is fully present in most day traders before they have even left the starting blocks as beginners, long before they’ve built up any knowledge, skills or discipline. That imbalance between expectations and experience is a great way to go broke in a hurry.
The right kind of trading simulator (“Sim”) has the potential to save your day trading career from a fast, fiery end. They allow you to trade with no real money on the line until you’ve shown that you won’t be a danger to yourself with real money.
What’s a good Sim?
You have lots of choices in Sims, but they’re definitely not all alike. Look for four characteristics:
1. You must have real-time data. You’d think they all do, but you’d be wrong. Some use historical data; others have delayed feeds. You want to be able to look at news now, real-time data and see the market’s reaction now and not from 20 minutes ago.
2. You need Level 2 data. Most people are familiar with stock quotes that show the “bid” and “ask” prices. Level 2 data is much more useful because it shows you which exchanges show quotes for how much of a given stock at what prices. It’s the difference between a grainy snapshot and a full-color movie.
3. The Sim should allow the use of hotkeys. Day trading happens so quickly that you’ll need to get comfortable using the fewest keystrokes to execute commands. By getting comfortable with these hotkeys in the Sim, you’ll be less likely to make a massive blunder with the wrong command later.
4. Your Sim should allow you to export your trading history. You absolutely need that data so you can regularly study how you did. That will enable you to learn from your mistakes and get better over time. More on this in a moment.
Related: Ask Yourself These Questions Before You Start Trading
Three minor downsides to Sim trading
First, it’s difficult to simulate the emotions you’ll feel when you take a trade and lose (or win) the equivalent of your mortgage payment in two minutes.
It’s also difficult to replicate actual market liquidity. In a Sim, you can, for example, put an order out to buy 100,000 shares, but in real life, there may be nothing like that quantity available. In this case, the Sim might lead you to think you could have made much more money than was actually possible.
The same stock at the same instant will behave differently, depending on the size of the position you take. Therefore, the best approach is to practice in a Sim by trading around 100 shares at a time. That’s an appropriate size for when you decide to go live with real money.
Finally, it’s hard to brag about your market conquests if that’s your style and you’re in a Sim. There’ll be plenty of chances to beat your chest down the road if you actually take the time to learn this profession.
More reasons to use a Sim
- The foundation of successful day trading is discipline. The very decision to first spend time in a Sim is an act of discipline. The Sim then allows you to cultivate enough discipline so that you take actions based on knowledge and experience, and not based on your emotions.
- If you’re serious about becoming a real day trader and not a gambler, there is so much to master all at once. The Sim allows you to get accustomed to reading charts, absorbing news and applying what you’ve learned, all coming at you through a firehose. Unlike most professions, you must make decisions not in days or hours, but in minutes or seconds. Fighter pilots also must decide things in seconds, and they spend countless hours in their own Sims before ever getting the chance to fly a plane worth millions.
- You can try different strategies without betting the farm, and learn to identify the type of stock behavior you’re most comfortable taking trades on.
- It’s only a matter of time before every day trader has a major setback or “drawdown.” The Sim allows you to work through your first drawdown without panicking. You can analyze what happened, get some advice and plan your comeback without undue stress.
Related: A Guide to Penny Stocks — From a Day Trader’s Perspective
Keep this in mind
You’re not confined to trading in a Sim for some arbitrary period, like years or even many months. You get to graduate to real money precisely when you’ve demonstrated that you can handle it, by virtue of your consistency in making profitable trades.
When you’re trading in a Sim — and even later when you’re trading with real money — you will shorten your learning curve if you keep a trading journal and scrutinize your trade history like a detective: What pattern did you see forming when you took that trade? What then happened? Did you stick to your plan to sell at a certain point, or did you let your emotions hijack you into doubling down? Trading experience is not about making the same mistakes over and over again; it’s about making plenty of different mistakes, then recognizing they were mistakes and learning what to do differently next time.
Gamers who are blazingly fast on their computers soon learn that there are no cheat codes when day trading. It requires rewriting the software between their ears to build the knowledge, skills, discipline and habits to trade effectively. That process takes a while. Even so, I know of no shorter way than a Sim to reach the point where you’re consistently getting more out of day trading than you’re putting in. It’s definitely worth the effort.