1. You get to prove to yourself whether the system you have chosen or been taught, is in fact, a profitable one. It also allows you the opportunity to tweak and refine the system and see the financial outcomes without any real risk. This will give you confidence in the system itself.
2. The process of option paper trading "trains" you how to react to adverse market conditions. Part of any good options trading system is the assmption that a percentage of trades will be losing ones. You need to be psychologically prepared for this. If a predetermined stop loss is part of your system then you need practice in accepting losses before you employ your own money.
3. The most successful options traders tell us that 90 percent of trading success is about psychology. You must have the right mindset when making trading decisions. If you adopt the mindset of a gambler, you will know the pain of gambling losses. It is absolutely essential that you approach your trading with the mindset of a serious business person. Every day you will make business decisions based on strict criteria. You will need to be patient and wait for the right setups and confirmation signals so that you do not make the mistake of trying to anticipate the market before it shows you where it's going.
You will need to practice the way you manage your trading capital and use position sizing in a systematic way so that you don't risk too much of your money on any one trade. You may need to make some mistakes in this area and "feel" the consequences of greed or unnecessary risk. Option paper trading is not just about identifying trading opportunities, but also about learning the self discipline that is so necessary if you want to be successful.
The most popular options brokers such as ThinkorSwim, TradeKing and OptionsXpress, include an attractive feature which allows you to paper trade without using real money. They offer you a "Virtual Trading" tool, where live options prices are applied to live stock prices and you can try out your trading strategies without risking real money. But everything else is real, including trading reports which keep a record of all your transactions and brokerage costs, so that you can see what your profit or loss would have been, had you been trading with your own funds.
You simply add an imaginary amount of money to start with and then proceed with implementing your trading plan. This is an excellent way to gain real confidence that you can actually make a living trading options.
One last thought. Option paper trading needs to be taken seriously for it to be truly effective. A casual approach which neglects to monitor your trades or enters questionable positions knowing that you can't really lose real money, is a dangerous psychology. Believe me, when you graduate to using real money, everything will change at an emotional level ... so use it as a serious training ground and you will be rewarded.
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