Question:
I cannot trade with "real money" as yet; however, how do I go about setting up a paper trading account?

Answer:
You can paper trade various ways and it really does not require that you have anything more specialized than a notebook to track your trades and access to charts.

Begin by funding your paper trading account with the amount of money you think you will really begin with, whether it is $2000 or $20,000. I would suggest that you begin with no less than $5000 and $10,000 is even better.

Next you need to decide on which markets you are going to trade. The more money you have in your account, the more markets will be available to you. If you are trading with a $5000 account there is no point in becoming familiar with a market like Crude Oil that has a margin of $3000 per contract!

Assuming that you are a smaller trader, you will be most interested in the lower margin markets like the grains, some of the meats, maybe a metal and a currency or two. I would suggest you limit your scope to about 6 - 8 markets, as these will be enough to track on a daily basis.

Even real money traders rarely follow more than 8 markets...it just becomes too cumbersome, as I'm sure you will find when you've got more than one paper trade going at a time.

If you don't know which markets to choose from, maybe I could make a couple of suggestions:

Corn, wheat, oats, or canola - these are good markets for traders of all levels, but especially the beginner. The margin is not too high and the markets normally act predictably and trend well. Corn, oats and wheat have a tendency to move together (but not always), so trading all three can be redundant. Oats have a tendency to "lead" the other two markets, so you might want to watch it for cues as to what corn and wheat are likely to do.

One of the members (JeffK) trades Canola, and while I've never traded it personally, it does seem like a good trending market with decent volume and very low risk amounts. It is certainly a good "training wheels" type of market to help you get a handle on placing orders and dealing with your emotions without costing you a lot of money in the process.

Cocoa - a good market to make money in as a small move can add up to good profits. Also can be a good market to lose money in for the same reason. I don't mind cocoa, although I know people who have sworn it off. This is the time to find out if it is for you...when it doesn't cost you real money.

Sugar - a good market because it is easy to get in with minimal risk; however the abundance of support and resistance can make it confusing to new traders. The tools in The Truth About Trading Support and Resistance manual (http://www.tradershelpingtraders.net) will help you identify which resistance is likely to be most influential.

Live Cattle - a decent meat market. Some new traders avoid the meats entirely because of their ability to make huge ranges. Cattle is the "safest" of the meat markets.

Cotton - can be a good market, but is capable of making large ranges. I used to avoid cotton like the plague, but have become fonder of it in recent years.

Soybeans - the Pork Bellies of the Grain complex. If soybeans are too volatile for you consider trading one of the bean cousins, like soybean oil, or soybean meal. They tend to mirror soybeans, but are generally less margin and less volatile.

Silver - I like the metals; however gold can be a little rich for the small trader. Silver mirrors gold - the poor man's gold. Some people like copper, but I consider it too thin and margins too high for small traders.

Canadian Dollar/Australian Dollar - two of the more reasonable currency markets. The margins are lower, but there is excellent money making potential. Other markets like Swiss Franc, British Pound, and Japanese Yen are good markets too but require much more margin and risk. All the currencies have a tendency to move in the same direction anyway (opposite the US Dollar) so it doesn't really matter.

The Mexican Peso is a very good trending market, but some people shy away from it because of the lower volume (relative to other currency markets). Personally I like the Peso and have had good results with it. It is another market that allows you to trade with very small risk amounts.

Now that you have a paper account and a mix of markets to trade you need to search the markets to find trades to make. Once you have found a trade you like, write down your entry, your exit and your profit target - exactly.

If you are dealing with a broker, you can call and ask them if your paper order had been filled on a particular day. Alternatively you can just look at the charts and figure it out for yourself.

Sometimes you will need to see an intraday chart to know exactly when you got your fill. Barcharts.com offer free intraday charts. Just follow the commodity chart link and then click custom charts to alter the time frame displayed to a 5 or 10 minute interval.

Track your trades day by day keeping a journal of your profits and losses. Allow an extra two ticks on your fills and exits as this will simulate slippage. Brokerage fees are usually $40 round turn per contract.

Make sure to note what you did right and what you would do differently the next time.

See how well you can do but be honest. Cheating here will not help you in the future. I'm sure you've heard it before, but nothing changes when you trade with real money. If you can't do it on paper, you won't make it for real. Trust me. I've been there.

If you don't already have it, you might want to consider using Gecko's Track 'n Trade Pro. As the name suggests the software not only provides charts but also "tracks your trades". You fund a fictional account, place your orders and the software will automatically update your position day by day. It really is phenomenal software. If you are halfway serious about trading you should check it out. It is a legitimate tax deduction too. ;-)

You can get a free 30 day trial by following this link: http://www.trackntrade.com/demo/?abbr=SENFT

There is also paper trading software out there and on the internet which is supposed to simulate trading; however in my opinion it is not realistic for most small traders.

Some of the simulators only allow you to trade the e-mini and others start you out with a $50,000 account. This is great if you want to trade the e-mini, or if you are trading with a $50,000 account, but this is not the case for most traders.

Anyway, that's paper trading in a nutshell. Hope it helps a little.

Got a question that needs answering like an itch you can't scratch? Send it along to me at Erich@tradershelpingtraders.net and I'll be happy to try and clear things up for you.

PS. Don't skip this part of your education. Most traders hurry through paper trading only to get killed in the markets. Don't make this mistake.
 

A Sampling of the Markets we're covering this week...

Currencies Market Overview

The Australian Dollar was the big disappointment this week as the market gapped our intended entry, only to post a very impressive rally for the remainder of the week. The setup was solid, but the opening parameters kept us out of the trade. Next time I might just run the trade without the opening parameters, especially if the setup is as strong again.

The British Pound, EuroFX, Canadian Dollar, Swiss Franc and Japanese Yen all followed suit and continued higher last week as well. We're technically in a bull market in the currencies now and will continue to focus on buying opportunities. The Peso is the only market against significant long term resistance, so we'll have to see how the market handles that.

US Dollar Index

We did manage to catch a nice little move in the US Dollar Index last week as the market fell rather abruptly through support. This was a good little trade because we had the market cornered between support and resistance which made buying/selling the market easy. Once we identified the support and resistance areas we simply bracketed the trade and let the market show us the side we should take.

Did you notice the support and resistance? The support came on Wednesday's low at 8611 and the resistance at the 8667 high from Tuesday. While the 8670-ish line was a little more obvious, both lines "pop" out when you draw in their respective trendlines. This is exactly why a trendline is such a powerful tool: it helps you identify the stronger support and resistance points. I left the old trendlines in place on the chart so you could see what I was doing with the trade.

The first profit target for the trade is support at 8475 – 8480, but rates have come down a little more quickly than expected and now RSI is very near a third testpoint. As such I would probably expect a reaction here on Monday which might send rates higher; therefore we need to focus on stop management.

Technically the "ideal" stop placement is at breakeven, but with a little over $500 in profit per contract as of the close, you might want to consider something tighter, especially if you're trading multiples. The intraday chart is showing resistance at 8543 so you could place your stops just above here (above 8550 would be ideal) to protect more profit.

What I think we'll see happen is a short term reaction to the trendline/RSI support before the next decline, but how you plan on handling the "reaction" is up to you and your pocketbook.

CONTINUATION of Short December US Dollar Index from 8599
Exit Order: breakeven (although I probably go 8547 – 8551)
Approximate Risk Exposure: $0 per contract
Profit Target: 8477
Approximate Potential Profit: $1220 per contract
RRR: n/a
Degree of Risk: Moderate to HIGH

The charts in this publication are all made using Gecko's Track 'n Trade charting software. You can get a demo for free here. The rest of the Markets in all sectors are covered in the Subscriber Edition.

This is only a small sample of the markets we cover!

For a detailed analysis of ALL of the markets in ALL sectors, with explicit charts, entries, exits, stops, risk/reward ratio, potential profit, (and much more) please join us at http://www.supportandresistance.com/subscribe.html

Take care, and good trades to you for the coming week!
 

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