A stock trading simulator is designed to let you trade stocks without risking any real money so you can sharpen your trading skills without risk.
One type of stock trading simulator is the kind found in trading software packages like OmniTrader. These use historical data and you generally pick a start day and then run a scan on a group of symbols, make your trading decisions, and then run the next day and so on until you stop or run out of data.
The other type of trading simulator allows you to set up a dummy trading account that you can use to make trades in real time. This is exactly like real trading in all respects except the money is not real.
While a stock trading simulator sounds like a good idea because you get to practice trading without risking any real money the reality is that these do little to prepare you for actual stock trading.
Why? Simple, unless you have real money at risk you will not, and I mean WILL NOT, make the same trading decisions that you would make with a stock trading simulator where you have no risk.
The reason for this is because human emotions will take over as they inevitably do and you will make trading decisions while supposedly practicing with a stock trading simulator that you would not make in real-life trading.
The only exception to this is if you have a mechanical trading system and you follow it to the letter because if you follow your trading rules exactly you will have removed the emotional component of trading that causes problems for so many would-be stock traders.
I have used stock trading simulators to practice my discretionary trading skills and can tell you that it is so easy to trade with these and make “money”. You can just cruise along and take trade after trade and you feel like you’ve got this trading thing down.
You even start to wonder how it can be this easy while others seem to struggle with trading. Maybe you are just smarter than most people? Maybe you have the trading instinct etched indelibly in your brain.
Whatever the reason you finish learning to trade with the stock trading simulator and then decide it is time to start making the big money so you open an account and begin to trade.
Can you guess what happens to most people once they put that first trade on and it starts to go against them? They get that deer in the headlights look and freeze. They are afraid to get out of the position with a loss. They feel that they can will the trade to go the way they want.
All of a sudden those many hours of practicing have flown out the window and now when there is real money on the line they panic. Some will tell themselves that they will get out if the stock can just get back to where they can break even. They never do though thinking that the trade is finally starting to go their way.
Others, and I myself have done this, get the ostrich attitude and bury their heads in the sand and ignore the trade as it continues to deteriorate because they cannot stand the pain.
These people usually wait until the trade is so far gone that there is little hope of any meaningful recovery and then they finally get the courage to close the position telling themselves they now have a nice tax loss to offset all of the profitable trades they have made.
So, the moral of the story is this…
If you do use a stock trading simulator realize that even though it is technically the same as trading with real money the reality is it is not the same and you need to be aware of this before you start to risk any trading capital or you will quickly find that you really haven’t learned anything.