Getting Some Practice with Simulated Trading“One must learn by doing the thing. For though you think you know it, you have no certainly until you try.” - SophoclesEducation professionals have long understood that there are two ways of learning: listening and doing. An example of learning by listening is sitting in a classroom while a teacher lectures. Students are expected to sit quietly and soak in the instructor’s wisdom. Reading a book is also similar to a listening process, in which the words wash over a reader. While such learning is an important element of education, it has limitations. In particular, studies have shown that a passive audience retains only ten to thirty percent of the material it’s exposed to. In contrast, doing (active learning) calls for physical involvement by the students. Students are engaged at a much deeper level when they must manually arrange a physical experiment or verbalize a philosophical argument. Active learners can retain fifty to seventy percent of the material they are exposed to, a far more efficient teaching and learning technique than listening approaches. An obvious game analogy is that there is only so much one can learning by hearing the rules of a game described. To really learn a game, there is no substitute for actually playing the game in real time, with real opponents and/or teammates. The investing world is no different. Reading the earlier chapter of this book or watching TV shows focused on investing such as CNBC are low impact ways to be introduced to important ideas. Gaining the necessary confidence to make and execute one’s trading decisions calls for deeper or more active participation. The doing method we focus on in this chapter is a low stress exercise involving simulated trading. Another active learning experience is taking part in an investing club where all participants are required to contribute to conversations and decisions—no wallflowers allowed. In this chapter we focus on simulation software that allows us to execute trades (buy and sell) mutual funds, ETFs, and even individual securities. As passive investors our focus will be on investing through diversified funds, but it’s useful and easy to practice trading individual instruments as well. Go Where the Action isTrading financial securities is an important way to gain exposure to financial markets. To get a more complete financial markets experience, you should consider getting a first-hand view of the action. Consider visiting a nearby stock exchange. Find out if such an organization exists nearby and investigate whether they have visiting hours for tourists. If they do, make the time to visit. If you are near a financial center, go visit it. Ideally, you can arrange to meet a friend or family member who works in a financial services firm so you can actually go in the building. Otherwise, you can still get some feel for it by wandering through the streets and lobbies of a financial center. Lunch time may be ideal because then you can see the hordes of employees heading to lunch and perhaps even pick up some interesting lunch conversation. You can also get a feel for the intrigue within these fabled firms by reading insider or journalistic accounts. There are many good books about Wall Street firms and (in)famous individuals (e.g., Liar’s Poker by Michael Lewis). There are also some good books on the recent financial upheaval and its causes (e.g., Too Big to Fail? by Andrew Ross Sorkin). Caution: To get a better sense of the realities of financial markets it’s useful to immerse yourself, but don’t allow yourself to be seduced. It’s easy to be affected by the glitz and glamour. Remember that your fees are paying for the fancy buildings, suits, diamonds and gold watches these folks wear. It’s also easy to begin to believe that you can do it as well, go home, and feel inspired to boldly (aka stupidly) re-invest the family savings in a risky venture. Remember that life on the fast lane often ends in crashes. Simulated TradingEarlier I discussed the importance of doing—buying and selling financial securities. While there is an undeniable element of excitement in this level of involvement, there is also a significant amount of stress associated with trading real securities for real money—your money. Wouldn’t it be great if you could practice buying and selling financial securities without putting your real money at risk? The answer, of course, is yes and the good news is that there are trading simulation software packages that allow you to do this. Many such solutions are only available to students in business schools or employees of corporations in the financial services industry. But there are ways for individuals to gain access to such tools for free. Typically, free access is made available through software programs that lack some of the bells and whistles of the real trading products. Security prices on simulated platforms may not precisely reflect real-time market pricing, and it may take longer for trades to show up in one’s account. Nevertheless, for the beginner, and especially one who focuses on basic financial instruments such as stocks, bonds, ETFs and mutual, a basic trading platform is more than sufficient. For several years I’ve had my investments students use Stocktrak.com. This comes at a cost of roughly twenty dollars per account. I usually have two students share an account, so they each end up paying roughly ten dollars for twelve weeks of unlimited trading. People not affiliated with a university program can also join with a StockTrak account for $15 per month. This allows stock, option, and futures trading on multiple exchanges around the world. Traders can practice trading strategies with fictitious $100,000 portfolios. A less formal and free platform is made available by the same company. It’s called Wall Street Survivor. While this free platform doesn’t offer all the features and trading options offered by the full subscription, it’s perfectly sufficient for learning and practicing the basics of buying and selling securities. Free Trading Simulation SoftwareBelow is a list of trading simulation software tools you may wish to experiment with. As noted in the introduction, some of these may no longer be operational. You only need to find one that works! Real Fast Trader Simulator Tool (Real Fast Trader user guide) Trading Simulation ExercisesOnce you’ve opened your trading simulation account, get some practice by following the exercises listed below. You should also feel free to improvise. Exercise: Using your play money account purchase the following financial instruments:
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Passive Investing Steps
