Improve Trading Skills with Stock Market Simulator

The #1 problem with trading

Imagine you’re a beginner at trading and blackjack.

What do you think – do you have higher chances of making money with trading or blackjack?

According to research by the Securities and Exchange Commission, there is a higher win rate using a basic blackjack strategy or simply betting red in roulette than trading stocks or currencies.

On average, only 25% of retail stock traders stay in the green. The remaining 75% lose 30% of their initial deposits within the first three months of trading.

Silver lining: According to large-scale research done in Taiwan, 15% of day traders earn abnormal returns (net of fees). However, less than 1% of the day trader population could predictably and reliably make positive abnormal returns net of fees.

What’s the main takeaway? First, trading is complex and risky if you don’t know what you’re doing. As a result, only a small portion of traders become full-time traders with consistent returns.

Four steps to minimize the chances of painful losses

Experienced traders often recommend this 4-step approach for beginner traders:

1. Learn the theory from books and courses emphasizing risk management strategies.
2. Parallel to learning theory, use a trading simulator to learn the basics of markets without risking a penny.
3. Open a real trading account and trade small positions ($5-$100).
4. Gradually increase your positions once consistent with the small sizes.

One of the reasons why most beginner traders lose their money is that they skip the first critical steps. 

Let’s look closely at trading simulators to understand their pros and cons.

Top 7 benefits of trading simulators

A good stock market simulator allows you to dip your toes in the trading world without risking your hard-earned money. You usually get around $100k of virtual money that you can use to buy and sell stocks, gold, oil, or index funds.

Here are some of the main things you can learn with a stock simulator:

1. How various assets react to economic and political events.
2. How to read charts.
3. How to spot chart patterns.
4. How to use technical indicators.
5. Test different trading strategies.
6. How easy it is to lose money without a solid risk management strategy.
7. How to use stop-loss and take profit orders.

You can also do all this in a real trading platform, but each mistake could be very costly. A trading simulator allows you to learn the ropes in a safe environment without being afraid to lose all your savings…

…which brings us to the problems of trading simulators.

A few things to be careful about

Here are a couple of factors you should keep in mind when using a day trading simulator:

1. False sense of skills

Trading with virtual money can create a false sense of one’s skills. Losing $50k of paper money will not keep you up at night like losing real $50k. As a result, your overall psychology will be very different. And trading psychology is a crucial aspect of trading. That’s why after learning the basics with a day trading simulator, it’s recommended to practice trading with real money, but small positions. Your decisions under stress with real money will be very different from trading game money.

2. Trade execution times are different

In trading simulators, your orders are usually filled instantly. However, in real life, it is only sometimes the case. For example, when buying or selling real stocks, you might have to wait for several seconds until your trade gets executed. And if you clicked the “BUY” button when the asset price was $100, the fulfillment price after those several seconds might already be $105, as there were no sellers at your desired price. Thus your potential profit might get instantly reduced.

3. No commissions in most trading simulators

Most trading simulators do not include commissions in the calculations of profit/loss. And although all brokers have significantly reduced their commissions in recent years, commission deductions can still seriously decrease your profits. You’ll get into big trouble if you start trading in a real account and don’t include commissions and spreads in your calculations.

10 Tips For Finding The Best Stock Market Simulators For Day Traders

It’s easy to get overwhelmed when looking for a good trading simulator, as there are more than a hundred different stock market simulator apps and websites.

Here are the key features you should look for when searching for a good stock market simulator:

1. Does the simulator offer real-time prices? Most simulators have delayed asset prices. Some show prices that are delayed by 15 minutes. Some are updated only once per day, at the end of the trading day. Both cases will not be suitable for learning day trading, where you need live prices that reveal the market pulse and reaction to live events.
2. Are there candlestick charts? Day trading without candlestick charts is like hunting in a fog. A candlestick chart contains four times more information than a simple line chart. On top of that, most of the chart patterns and trading strategies are based on candlesticks. Furthermore, experienced traders usually determine the entry and exit points using candlesticks. Long story short: a simulator with just a line chart will not teach you much.
3. Are commissions included in the simulation? As described earlier, getting used to commissions while still in a paper money mode is beneficial.
4. Does it offer technical indicators? To become a decent trader, you need to learn to use some of the most popular indicators like moving averages, Fibonacci retracements, RSI, MACD, and others.
5. Are there any stock research tools? It’s good to have some financial information about the company available at your fingertips when trading. It’s more critical for day traders than for those who hold their trades for extended periods.
6. Are there other assets besides stocks? Even if you’ve initially planned to trade just stocks, it’s also practical to practice trading other assets like indices, currencies, ETFs, cryptos, and commodities like oil and gold. Trading other assets will broaden your knowledge about the financial markets.
7. Is there a way to practice risk management? Even the best traders can not predict the market with 100% certainty. Thus, you should always have an exit strategy before entering a trade. A stop-loss order is one of the most efficient protection tools against excessive losses. So, if you can, go for a simulator that offers a stop-loss functionality.
8. Is there any educational value added? Using a simulator without any theoretical understanding of the markets is not enough. Looking for a resource with some educational content integrated with the trading simulator is recommended.
9. Is the stock simulator experience engaging enough to keep you around? Practicing alone can quickly become boring, and you won’t last long enough the learn the basics sufficiently. One of the best ways to boost the motivation to learn with a simulator is by having an active leaderboard where users can compete against each other in a safe environment.
10. Can you see your entry and exit points on the chart? When your day trading, it’s very helpful to see where exactly on the chart you entered and how it relates to the current price so that you can understand how your trade is doing relative to the current market trends.

Two most popular stock market trading simulators

We did some research and picked two of the best simulators to help traders boost their trading skills and gain confidence.

According to our 10-factor analysis, the best stock market simulator is the Stock Market Trading Simulator by Three Investeers, a creator of popular educational finance mobile apps and games. They have emphasized a dynamic trading experience with real-time charts, risk management tools, and technical indicators. As a result, it’s an excellent tool for anyone interested in trading or investing. In addition, the educational content in this app is really engaging and easy to follow. 

You should also give a try to the Investopedia simulator (available only on the web) which is one of the oldest stock market simulators. However, keep in mind that it’s targeted for longer-term investing. Learning to day trade with this simulator is impossible as their prices update with a 15-minute delay and they don’t offer candlestick charts, technical indicators or stop-loss simulation. 

Summary

Practicing with a trading simulator is an excellent addition to learning the basics from books and courses. However, it’s essential to remember that simulators have their weaknesses, and you should expect to avoid getting identical results in a real trading environment.