Simulation Trading: 4 Best Practices for Profitability

Jan 27, 2022

Written by:
John McDowell

Trading Simulation: Enlighten Your Edge

Despite what you may have been told, simulation trading can increase your chances of becoming a consistently profitable trader. It’s all dependent upon on how you use your time in the software. Here’s why.

As we’ve covered in recent articles on the top 4 simulators with replay, and the big myth behind paper trading, if you come to trading as a beginner with the attitude that simulation doesn’t correlate with real-world performance, you’re misguided. However, if you simply use simulation trading for fun, or in an undisciplined and unstructured way, you’ll likely never reach the potential you wish for. That is, not without a lot of loss and heartache and time spent.

This is the type of thing that comes with passion. Are you passionate about studying the markets and putting in the time and effort needed?

If you’re motivated to learn and master markets, you’ll enjoy simulation and playing with trading ideas.  If you’re motivated by making money and showing off pictures of your new cars on social media, simulation won’t hold much appeal. 

When surgeons learn new techniques, they practice on models and cadavers before “going live”.  If a surgeon told me he didn’t think such practice was important, I’d likely look elsewhere for my procedure….

Dr. Brett Steenbarger, PH.D.

To that end, we want to help you shorten your learning curve by discussing four best practices for simulation trading that will likely increase your chances of success.

Simulation Trading Best Practice #1: Screen Time and Exposure

There is one thing all stock educators and gurus agree upon. The amount of screen time you accumulate studying the markets will likely correlate with your understanding of trading. It might not cause success, but it will certainly help.

The more screen time the better. Don’t take our word for it, just listen to Jack Tacher in our recent podcast talk about how many 1000s of charts he reviews. Well, we couldn’t agree more. But the problem is that there are only certain hours of the day in which you can trade markets. The New York Stock Exchange opens at 9:30am and closes at 4pm.

What if you are getting into trading part-time? Can you really put in the focus you need when your boss isn’t watching your cubicle? It’s hard to place trades while waiting tables, building a house, or meeting with clients.

Simulation Trading Is Available On Your Schedule

While not all simulators will allow you to trade in a realistic market environment outside of normal trading hours, TradingSim, does. We’ve also reviewed a handful of other simulators with replay here. The benefit of these applications is that you can essentially push play, like a DVR, and study the markets in the evening, the weekends, or whenever you want.

Regardless of whether or not you can trade the open, it allows you even more screen time. Perhaps you didn’t see certain stocks that ran during the day. After all, you only have so many screens and so many eyes. But the market has 1000s of stocks.

Simulation trading allows you to go back and see what you missed with the intention of finding these opportunities better in real time.

This leads us to our next point: the importance of review.

Simulation Trading Best Practice #2: The Importance of Review

If screen time is a prerequisite for success, then review has to take the #2 spot. It’s imperative. How else will you know where you went wrong?

Reviewing trades and performance reveals so many underlying issues with our trading that are simply overlooked in the heat of the moment.

Dr. Brett Steenbarger has this to say about reviewing trades:

Good reviews give you fresh views.  Good reviews help you see new things in the markets you trade and in how you’re trading them.  If reviews aren’t providing you with insights, they probably aren’t providing you with learning.

Dr. Brett Steenbarger Ph.d.

Along those lines, one of the best ways to review is to get into the simulator and replay the market. Replay your trades. Relive the experience. Observe what’s going on around you in an effort to discover insights and new ideas. Watch the Level 2, Time and Sales, or other key elements of the trade to find patterns and key areas.

How to Use the Simulator for Review

According to Steenbarger, there are three things you should be aware of when reviewing trades.

  1. Don’t review too much
  2. Create actionable insights
  3. Revisit your goals and takeaways

This sounds really simple. However, many traders create information overload by observing and reviewing waaaay too much data. As we will touch on in a moment, the goal of the sim is to boost your confidence in a strategy. For that reason, be focused in a specific area of the market.

Good review doesn’t really do much for you if you don’t takeaway insight from that review. Watch your trades in replay, study the Level 2, but make notes about certain things you see. Was there a large order being pulled before the flush? How did volume react at certain levels or certain times? Make notes for your next trades.

Lastly, keep your notes and your progress handy. The point of goals is to achieve them. But without incremental steps and a solid process, goals become elusive. Remind yourself to check in with your progress on the action items you create from reviewing.

Simulation Trading Best Practice #3: Backtesting Patterns in the Market

This best practice is an extension of the first two. You’re not going to discover a pattern overnight. Sure, your guru may have found a pattern, but how do you know it works? Did you see her excel spreadsheets? And more importantly, how did she find that pattern?

The bigger question, if you have some sort of pattern in mind (and there are many…), is how you will know the probability of its success. What makes that pattern work? What makes it fail. Herein comes the need for a simulator.

As successful traders like StockBee and Qullamaggie have written, a simulator allows you to see 100s, if not 1000s of patterns in the market. In other words, backtesting. On that token, we’ve written an article about how to find a setup of your own. We’ll share a few tidbits from that article.

Things to Consider When Backtesting Your Strategy in Trading Simulation:

  • Is your personality suited for the long or short side of trading?
  • Do you like swing trading or shorter term daytrading?
  • What patterns do you see on your charts? Gap and go? Gap and fail? Mean reversion?
  • What is the float, market cap, price, and average volume of the biggest winners?
  • If day trading, what time of day does your setup work best? Worst?
  • Does volume predict anything in your setup? Compared to float?
  • What about short % of float should you consider?
  • Do fundamentals like potential offerings or dilution have any affect on your strategy?
  • What do you observe in the tape intraday during the pattern you have observed?
  • How do your successful trades’ charts look visually in comparison to each other?

No one will be able to tell you exactly what to look for. That’s the beauty of what we do. It takes hard work, time, and effort to find something in the market that you think is exploitable over and over again. That’s what we call an edge.

That being said, your edge may change depending on the market. But your goal in trading simulation is to discover the strategy, then add to it.

Simulation Best Practice #4: Trade Execution Refinement

This occurs after you have found your setup. Similar to review, this is actually a specific element of review.

The more granular you become in your backtesting, the more confident you will become. Most retail traders simply have no clue what they aren’t seeing. They take another trader’s advice and run with it.

You, on the other hand, if you’re diligent, will know what triggers your entry, what rules you need to follow, when you will need to stop, and more. It is a more complete picture of the trading process.

Think about it this way:

The best professional performers on any stage often know multiple layers of “what ifs” before they perform. What if I lose my lines on stage? Could the patient’s blood pressure drop during surgery. What if the defense moves in this direction before I snap the ball? Could the enemy surprise us from this location, or that location?

You get the idea. You’ve either been there and done that before you’re actually “there,” or you’ll be surprised. It’s no different with trading.

Trading Simulation gives you the confidence in a safe training environment to study all the variables and nuances of what could happen.

Refinement Criteria to Look for in a Trading Simulator

Here are a handful of examples of what a simulator can help you with in regard to refining your trade process:

  • Entry trigger/criteria based on volume/price/indicator/condition
  • An area to define risk (setting your stop out)
  • Rules for trade management
  • When to add to a winning trade
  • Profit Targets
  • Exit criteria
  • Larger time frame points of support/resistance
  • Influence of news, sector, or fundamentals
  • Caveats to your rules
  • Anomalies
sharpen your trading skills with trading simulation

As you can see, there is more to just finding a pattern and going long or short. You need to paint the picture in your mind of all the different characteristics of what could go wrong. You need to be prepared for anything. At the same time, you must have a vision for what the trade should look like.

This takes time. Trading simulation shortens that time.

Conclusion

We hope you find this information useful. In order to help you along your journey, we’ve created tons of free educational information on different types of patterns, indicators, and strategies. If you’re new or considering TradingSim, we offer a 7-day risk free trial.

Maybe it’s time you get in the Sim and find your edge?

Tags: Day Trading Basics

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