Why You Should Practice Paper Trading

I’m going to talk to you real quick about using something called “paper money” in order to learn how to invest. Paper money trading is really cool. Let me tell you about it.

What is Paper Money and Paper Trading?

What is paper trading? Paper trading is an idea that means trading stocks with pretend money, but doing it with real numbers in real time.

By combining the internet with the idea of paper trading, we have a really great package for online stock trading that helps us develop ourselves as investors, without taking any real money risk. We can also trade paper money without incurring the kind of emotional trauma when we use real money and we know that we don’t know what were doing.

How to Set Up a Paper Trading Account

What you should do is get yourself onto one of the paper money trading sites. Think or Swim is the one that we use a lot, but there might be some other great sites out there. Just google “paper money” or “paper trading” and go out there and get your account set up.

After you sign up, on thinkorswim.com you end up with about $200,000 of pretend money to “invest” in a system that’s using virtually real time data.

Why You Should Practice Stock Trading

When you start investing you want to see that the effects are going well for you before you go out and start investing with real money. You want to have the benefit of doing some real trades before you start using real money because stock trading for beginners can be scary using real money when you’ve never done it before.

What Do Rule #1 Investors Use Paper Trading For?

Rule #1 Investors use paper money all the time. We do back testing with paper money, we practice trades in paper money and we use it in all of our classes.  Get set up with a paper trading account as soon as you can, so that you start to be able to do almost real trades as a way of working yourself into real investing.

By the way, if you’re starting with no money at all, you have zero money, paper money is free. You can do real world investing, just the same as you would with real money, while you’re saving up to get that first $1,000.


Hey, I started with $1,000 dollars and I turned it into a million dollars. If I can do it, so can you.

If you liked this blog and you want to learn more, click the button below to learn how to invest with my FREE Digital Introduction to Rule #1 Online course. This course is packed with exercises and videos to teach you what Rule #1 is all about.

Now go play.

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About Phil Town – Phil Town is an investment advisor, hedge fund manager, two-time NY Times best-selling author, ex-Grand Canyon river guide and a former Lieutenant in the US Army Special Forces. He and his wife, Melissa, share a passion for horses, polo and eventing. Phil’s goal is to help you learn how to invest and achieve financial independence. You can follow him on google+, facebook, and twitter.

  • ENS

    I have been studying the Rule#1 book for a month or so, and started paper trading 12 days ago and am up 5%. Crazy! Anyway, I have a question if anyone can help. What time frame do I view everyday on the charts? All of the pictures in the book look like 3 month charts are being used, but why wouldn’t I use 1 day charts to be most current? The signals are very different depending on the time frame. Please advise.

  • Mike Mac

    Interesting post from James Rickards today:

    Jim Rickards ‏@JamesGRickards · now20 seconds ago
    Congress rejected the #IMF bailout bill. Now the Empire Strikes Back. @Lagarde to give #China reserve currency status http://bloom.bg/1wCDCzY

  • Garrett

    Hi Mike Mac! Regarding your post about NFLX – thanks for sharing! I got NFLX wrong years ago – I didn’t believe they had a MOAT. I still don’t quite understand NFLX’s ability to fight off all that competition – especially since all movies are readily available from free streaming sources on the internet. As soon as a Blue-Ray DVD is made, it’s available somewhere for free on the internet.

    The other thing I don’t understand about NFLX’s MOAT is their password – my daughter and her friends share their other friend’s password to access NFLX saving themselves the need to buy a NFLX subscription.

    Anyway, if I were to invest in NFLX, I’d want to know its VALUE per share as opposed to its PRICE per share.

    Have you done any Rule #1 Homework on their Value that you can share? My guess would be Mr. Market has priced them at a very high PE Multiple and are currently being priced per share on what they COULD earn, not what they are earning…their price is based on a lot of HOPE in future growth subscriptions and great future-not-yet-written premium content that will continue to bring in 25% growth expectations. That’s too risky of a biz for my portfolio.

    One thing I found very interesting about companies such as HBO, NFLX, etc when compared to ABC, NBC and CBS is how the BEST writers are flocking to HBO/NFLX and leaving ABC, NBC, and CBS.

    Why is that? According to famed writer Aaron Sorkin who wrote such movies as A Few Good Men, MoneyBall, West Wing, The Social Network, etc. – he said in an interview that the huge difference between writing for HBO vs ABC, NBC, CBS etc is that HBO DOESN’T CARE about growing subscribers. He said they only want phenomenal CONTENT. Whereas all writers that have to write for ABC, CBS, NBC are writing for advertisers. They aren’t writing great content – they’re writing to appease the advertisers. That made a huge difference in his mind and perhaps its a reason there’s so much crap on regular TV versus paid programming/subscription based media.

    To Your Wealth!

    • Mike Mac

      I agree that the paid content out there is far superior to regular TV. I do not own and have never owned netflix. I was a subscriber at one time but canceled. I just enjoyed listening to Cuban highlight that news channels focus on trading and most guests focus on trading around some news tidbit. Cuban was quick to make the distinction between trading and investing in a company.

  • Joe R

    I’ve always been a fan of rule 1 and Phil. In particular the 4 M’s and the big 5 growth numbers are tremendous starting point and I hope to never buy a company again without that criteria.
    My concern is, the more I read about value and guys like Spier and PABRAI, the more I get confused on “rule 1 trading”. Is this still something we on this blog should try to do or simply buy great companies at a good price and wait?
    Also, any opionon on YNDX. Great growth and way down due to Putin. The Google of Russia.

    • Garrett

      Hi Joe R,

      A couple of good questions/things to comment on in that short post…thanks for asking.

      First, good on you for making the decision to “never buy a company again” with doing your 4M’s and looking at the big 5 growth numbers.

      Here’s one reason why that’s important and what I’ve learned over the many years – if you screw up buying a great company and ended up paying too much for it, well then at least you didn’t screw up and buy a bad company that was overpriced. Bad companies may never come back financially. But Great Companies – one’s you’ve identified as having consistent Big 5 Numbers and done at least a marginal amount of homework on your 4M’s, – well, most of these mistakes fix themselves in a year or two with the price correcting back to where you bought it – sometimes!

      Guy Spier said in his book that it was generally a good idea to wait two years before selling and taking the loss. Personally, like most rules to investing – they’re more like guidelines. As you get more sophisticated in your analysis and understanding of your business you may be a little more rational. But for newbies, hard rules help more than hurt.

      Ensuring you have 10% Growth Rates on your “Big 5” numbers will at least make sure you bought a pretty darn good company. That at least puts the odds in your favor that your company will recover.

      Now, Rule #1 is really a book on TRADING or as I like to say, “dancing” in and out of the company while in an upward, long-term trend. Payback Time is about INVESTING.

      Most people are traders. Buffett, Pabrai and Spier – definitely fall into the INVESTORS column.

      My dad – he’s definitely an INVESTOR. He’ll buy something and unless the Story drastically changes, he’ll just sit on it for the rest of his life. When he recently bought Exxon at $90 (he already owned it at $50), he didn’t care one bit that it was it was correcting from $96 .

      Regarding Putin and Russian investments – I won’t touch them. Pabrai won’t and either will Spier. They said it was too risky. So for me, it’s a quick pass.

      I’d rather invest in Panera, WholeFoods, BP (Yes, BP does own 20% of Rosneft, a Russian company), DeVita Health Care – something that I can understand or has the stamp of approval from Buffett, Prem Watsa, Pabrai, etc…

      To Your Wealth!


      • Mike Mac

        Mark Cuban was on CNBC yesterday. He was asked about his purchase of Netflix and the subsequent price decline. His response was great. He believes Netflix is a disruptive force and he like investing in disruptive companies. He said if it goes down 10% then he’s buying more. If it goes down another 30%, he’s buying met. He scolded CNBC for only focusing on trading. Trading is good for the news cycle. Oh my…stock XYZ dropped $4 today (kind of like CBI which I own), should I trade out? Cuban’s response to whether he would trade out of NFLX was no because he’s an INVESTOR. He’s investing in this company I believe is under valued.

        Now if the story changes….then get out of harms way.

    • Joe R

      Awesome comments Garrett. But after reading all of phils books and blog posts, I’m having a hard time deciding if I want to be a rule 1 trader or stock piling. On one hand value investing and stock piling is the proven way. Buffet, munger, pabrai, spier,etc didn’t become legends by trading in and out of companies. They bought companies and held them and occasionally sold them once they hit value or stopped being wonderful.
      On the other hand we have a record high and fed support with crazy low interest rates. A perfect storm to trade and make some money before the “music” stops and the inevitable draw down occurs. But again this goes against the tried and true value way. Dilemma indeed.

  • Garrett


    A few years ago I read a book by Ken Fisher called:
    The Markets Never Forget (But People Do): How your memory is costing you money and why this time isn’t different.

    Then in Guy Spier’s book The Education of a Value Investor, we learned that one of the hard lessons he learned was to turn off the talking heads on CNBC et al.

    With that mentioned, I’d like to know how far oil prices will drop and for how long. If I could do that, I’d be one of Forbes richest people in the world.

    Since I can’t do that, I have to guess. And guessing isn’t a Rule #1 thing. So that means I have to wait and be willing to invest more on the way down or trade it to minimize losses – but also then minimizing profits.

    I’ve decided to wait. Patience or just doing nothing – it’s certainly one of the hardest things for good investors to do. It goes against my Type A personality. Hard to fight. So like Guy Spier, I’ve learned things I have to do to keep myself from investing and “doing something”…sometimes that means just walking away for awhile on Phil’s blog and turning off CNBC / Bloomberg on my SirriusXM radio.

    Rule #1 Investors like certainty and yes/no answers to question if we should invest or not. Because as Phil says, “We don’t do gray” – so if it doesn’t jump out to me, I have to pass. We shouldn’t make investing difficult or stressful.

    But I really hate these “experts” because they’re really good at not knowing anything or being able to predict anything. And when they’re flat dead wrong – they blame it on something other than themselves. Instead of saying, “Wow, we here at Goldman Sachs really screwed that one up. A few months ago we estimated that oil would easily be trading at $125 and now it’s at $65.00.”

    No, instead we get something like, “We’re revising our estimates for…” which is well after the fact.

    Which brings me to these interesting headlines/articles that were written before the “Oil Market Selloff”:

    Here’s one such collection from a Seeking Alpha article:
    What They Were Telling You In 2013 And H1 2014

    Back in 2013 and H1 2014, when Brent was trading around $110/bbl, the analysts and several other opinion makers were calling for oil to hit $150 per barrel. Let’s see some more details and the reasons behind these calls:

    1) In H1 2013, the U.S. Department of Energy reported that China overtook the U.S. as the world’s largest net oil importer. That was the time when a report from the Paris-based OECD (Organization for Economic Co-Operation and Development) came out and noted:

    “Based on plausible demand and supply equations, there is a risk that prices could go up to anywhere between $150 and $270 per barrel in real terms by 2020, depending on the responsiveness of oil demand and supply and on the size of the temporary risk premium embedded in current prices due to fears about future supply shortages.”

    OECD also noted in that report:

    “There is a strong price increase needed despite this new oil production coming on stream.”

    2) In H1 2013, Energy Aspects, an energy research consultancy, noted as linked above “All estimates point to Asian demand propelling growth.” It also said that the implications of the U.S. shale-oil boom could be overstated for the rest of the world if demand from Asia keeps up.

    3) In H1 2013, some analysts from Goldman Sachs wrote that Brent crude oil prices could rise to $150 per barrel in H2 2013 because:

    “Despite the boom in U.S. shale gas, the oil price remains high, which he attributed primarily to sanction-related supply disruptions in Iran. Trying to compensate for this, Saudi Arabia has already increased its oil production to a 30-year high this year.”

    Mr. Currie added that:

    “While global oil demand has increased at a slower pace, it is still higher than the production increases in non-OPEC countries. Upside risks for oil prices include low inventory levels, limited OPEC spare capacity, and geopolitical risks which are likely near an all-time high with production in a very large number of countries at risk, including Egypt, Iran, Iraq, Libya, Nigeria, Sudan, Syria and Venezuela. Europe still faces economic and policy headwinds, China just experienced a significant food inflation surprise (and the livestock impacts from last year’s agriculture price spike will only be felt this year) and the US still faces risks from the debt ceiling debate, the automatic spending cuts (or “sequestration”) and impending tax increases.”

    4) In H2 2013, when Brent was still around $115/bbl, the French bank Societe Generale said:

    “Brent crude is likely to rise towards $125 a barrel if the West launches airstrikes against Syria, and could go even higher if the conflict spills over into the rest of the Middle East.”

    5) As linked above, another report from JBC Energy in Vienna said in H2 2013:

    “Current developments such as low spare capacity in Saudi Arabia, stockpiles falling in the U.S., disappointing supply developments around the world and signs of an improving global economy are pointing to tighter markets.”

    6) In late 2013, the analysts at the National Bank of Abu Dhabi in UAE noted:

    “Average oil price was $112 per barrel in 2012. The average price of crude oil is forecast at $105 per barrel in 2013, $101 per barrel in 2014 and $100 per barrel in 2015. The base case is for oil prices to soften mildly, but remain close to $100 per barrel through 2018. Thereafter, prices rise by a few dollars each year in this scenario.”

    7) Even a few months ago in June 2014, the analysts were telling you:

    A) This is from Nordea Bank (OTCPK:NRBAY):

    “If Iraq, accounting for 3.7% of the world’s total oil production, suffers a serious disruption to its oil supplies, we will see a sharp upswing in oil prices as the OPEC effective spare capacity buffer is low, making the global oil market highly sensitive to further supply disturbances. If Iraqi oil production would fall back to the low levels seen during the invasion of Iraq in 2003, oil prices could easily rise by up to $30 a barrel as this would push the global spare capacity back to the lows when oil prices reached $150 a barrel in July 2008. High oil prices would put the world economic recovery at risk.”

    B) This is from PVM Oil Associates:

    “The deteriorating situation in Iraq could be the source of an oil price and therefore a financial shock should be sending economic-growth forecasters back to the drawing board. There can be no doubt that if Iraq’s southern oil operations are impacted Brent could reach $125 a barrel and beyond. Saudi Arabia may have 2 million barrels a day of capacity it can turn on reasonably quickly but that leaves no spare capacity margin.”

    C) This is from Commerzbank (OTCPK:CRZBY):

    “It is hard to imagine that the oil production in northern Iraq will return to the market in the foreseeable future. So far, oil production in the south of Iraq, which accounts for 90% of Iraq’s oil exports, has been unaffected by the fighting in the north and center of the country. However, the sharp price rise in the last two days shows that this oil supply is no longer viewed as secure, either. Without the oil production from the south of Iraq, the market would be stripped of an estimated 2.5 million barrels per day.”

    D) This is from the research consultancy Energy Aspects:

    “Look at any forecast, they are calling for Iraqi production to be around 7-8 million barrels a day by 2018/2020 for oil prices to not rise substantially. And I think that’s the key, because that’s not going to happen. If this is contained within Iraq that’s one thing, but there’s a very different implication if it becomes a bigger regional conflict. That’s the biggest problem. Iraq’s at the heart of this big oil-producing region.”

    What They Are Telling You In H2 2014

    Let’s see now what the analysts and several other oil “experts” have been telling you lately:

    1) In October 2014, Goldman Sachs slashed its 2015 oil price forecast. Goldman sees Q1 2015 WTI crude at $75/bbl versus $90/bbl previously and Q1 2015 Brent at $85/bbl versus $100/bbl previously. The U.S. investment bank said rising production will outstrip demand, joining other oil analysts who predict consumption will be dented by slower global economic growth and lead to a supply glut.

    2) Other analysts who joined the bearish party lately, predict that the bear market in crude will continue with prices falling as low as $50 a barrel, in part because the global economy is slowing, pushing supply levels higher.

    3) In late October 2014, fellow newsletter editor Dennis Gartman showed up and implied that oil could go to $40-$50 per barrel because among others, Lockheed Martin (NYSE:LMT) was working on a compact fusion reactor that could be ready within 10 years. He said:

    “Fusion is going to be the great nuclear power of the next 150 years. And finally, we are driving less and less. We are using so much less gasoline than we ever have, in global terms, in national terms, in per capital terms. All of those things, I think, are going to be weighing heavily on crude oil. And where could it go? A lot lower, a lot lower.”

    So within ten years from now, we will fit a nuclear fusion reactor on the back of our cars dumping our gas tanks. Let Star Trek come to life! Obviously, Gartman’s thesis also implies that Star Trek’s high-tech, innovative and game-changing tools will be on clearance, so all the people from China and India to Africa and America will not afford to overlook this irrationally cheap nuclear fusion reactor. I don’t even understand why an investor can take Gartman’s approach on oil seriously.

    4) The technical traders also showed up a few weeks ago calling for $40/bbl

    Here’s the rest if the article – it was well done.

    Remember, Markets Never Forget – But People Do!

    To Your Wealth!

  • Angela Wang

    This is an article by Richard Dunkan. I don’t know if I totally agree that the new tech (solar/wind engergy) will replace oil by mid century. What are your thoughts?

    Oil Crash
    The price of oil is crashing – and with good reason. Supply is surging, while demand is weak. Moreover, within just a few decades, new technologies, including solar and probably hydrogen fuel cells, will make oil completely obsolete. Anyone born after the middle of this century will probably never know the smell of gasoline.

    The price of oil fell by $10 a barrel last week. It’s now down 40% since June. This oil price plunge will have a significant impact on the global economy, so it is important to consider both its causes and its potential consequences.

    There are three main causes. First and foremost is shale oil. Thanks to the shale oil revolution, the United States is now producing almost 9 million barrels per day, the most in 30 years. By the end of next year, US production will be approaching 10 million barrels per day. So, even with most Iranian oil off the market due to sanctions, and with Iraqi oil production at somewhere near a quarter of what it could have been had there been peace in that country during the last decade, global output is increasing sharply. According to the International Energy Agency (IEA), global supply was 93.8 million barrels per day (mb/d) in September this year, up 2.8 mb/d from one year earlier.

    The second reason is that global demand for oil is weak. Demand from China is growing much more slowly than had been anticipated due to the economic slowdown there. US demand for oil is actually declining – in large part due to government regulations requiring improved fuel efficiency standards for cars. Furthermore, global economic growth is weak and there has been a very sharp slowdown in the growth in global trade. The IEA estimates global oil demand will be 92.4 mb/d this year and 93.6 mb/d in 2015.

    In addition to supply and demand factors, I believe there may also be a third reason for this oil price crash: the desire of the United States to punish Russia for supporting pro-Russian separatists in the Ukraine. Russia is one of the world’s largest oil producers. Russian government finances depend heavily on oil sales. Therefore, the drop in oil prices is a severe blow to Russia. I believe it is well within the power of the United States government to push down the price of oil by selling oil futures short. The lack of transparency or oversight within the $700 trillion Over-The-Counter derivatives market would permit the US government to do this without being noticed. Since this tool is available to US policymakers (and perhaps this is just the kind of situation that explains why the government has not imposed transparency on this market), no one should be surprised that they would employ it.

    Now, what about the consequences? Ultimately, the consequences will depend on two things: how far the price of oil falls and how long it remains low. Since we don’t know the answers to those questions, let’s focus on the consequences if the oil price stabilizes where it is now, at $68 per barrel for Brent.

    Consumers will be better off. Lower gasoline prices will be like a tax cut for the middle class, who will be able to spend more on other goods.

    The US trade deficit will become smaller as the cost of oil imports falls (although this will be partially offset since Americans are likely to use their savings from a lower gasoline bill to buy more consumer goods made overseas). A lower trade deficit will boost GDP.

    Lower oil prices will mean more downward pressure on consumer prices and a greater risk of deflation. The fear of deflation is likely to cause the Fed and the Bank of England to delay their plans to increase interest rates, while it may force the European Central Bank and the Bank of Japan to accelerate their asset purchases.

    In most countries, government bond yields have already fallen in response to the increasing disinflationary/deflationary pressures that will result from lower oil prices. Government bond yields in a number of European countries fell to record lows last week.

    The finances of the oil exporting countries will suffer. The currencies of Russia, Norway, Venezuela and Nigeria have already fallen significantly, reflecting the deterioration in those countries’ economic prospects.

    Lower oil prices are likely to put some high cost producers out of business. Canadian oil sands look particularly vulnerable. Some of the marginal shale oil producers in the US may also go to the wall. As bankruptcies occur, defaults on energy junk bonds are likely to rise significantly. At this stage, I don’t believe that the losses in the junk bond market will be significant enough to cause a new financial sector crisis. Nor do I believe that so many wells will shut down in the United States that US oil production will begin to fall. Production costs have been falling rapidly and are likely to continue falling. Oil prices will have to fall considerably further before most of the new shale oil production becomes unprofitable. Of course, the possibility that oil will fall much further can’t be ruled out. It was $20 per barrel not all that long ago.

    Finally, the reduction in the US trade deficit will mean a reduction in capital inflows into the US. (Capital inflows are the mirror image of the Current Account Deficit, since every country’s balance of payments must balance.) The reduction in capital inflows will reduce the upward pressure on US asset prices that has come from this source in the past.

    This has been an exciting few weeks in the oil markets and the drama could increase during the weeks ahead. But just imagine the extraordinary upheavals that will occur (in the markets and in geopolitics) when the realization eventually sets in that new technologies will make oil practically worthless sometime before the middle of this century. That realization still appears to be some time off, however. Between now and then, we are likely to see a number of other big swings in the price of oil, both up and down.

    • Garrett

      Well, I think we can all speculate and give good reasons for low or high oil. I’m more inclined to think that Saudi’s don’t want US to become energy independent so they keep pumping to drop prices and force US Balkan Shale companies to go under.

      We’re in the middle of Currency Wars and Oil Wars in these financially engineered markets.

      To Your Wealth!

  • Keith

    Enter the ticker symbol for the biz you want to research. Once on that business’ page, click the tab which reads: “Financials”. The top 3 row will be “revenue”, “cost of revenue”, and “gross profit”. “Gross Profit” numbers are the raw data you ought to be using for your sales growth rate (at least that’s what it says in the book, Rule #1). Now, of course, you know to convert these raw numbers into compounded annual growth RATES If you don’t pay for Morningstar you only get 5 years worth of numbers. At any rate, you can get all 10 yrs worth of numbers free at GuruFocus.com by clicking their “10-Y Financials” tab, and then scrolling down below the “Income Statement” heading. I hope this helps.

  • Itch

    Sorry for writing something not on the topic of this article. But can someone out there help me find “Sales Growth Rate” on morningstar.com

    By the way I never thanked the person who found me the morningstar website after MSN Money changed theirs and I didn’t know what to do.


    • Keith

      Enter the ticker symbol for the biz you want to research. Once on that business’ page, click the tab which reads: “Financials”. The top 3 row will be “revenue”, “cost of revenue”, and “gross profit”. “Gross Profit” numbers are the raw data you ought to be using for your sales growth rate (at least that’s what it says in the book, Rule #1). Now, of course, you know to convert these raw numbers into compounded annual growth RATES If you don’t pay for Morningstar you only get 5 years worth of numbers. At any rate, you can get all 10 yrs worth of numbers free at GuruFocus.com by clicking their “10-Y Financials” tab, and then scrolling down below the “Income Statement” heading. I hope this helps – See more at: http://www.ruleoneinvesting.com/blog/why-you-should-practice-paper-trading/#comments.

    • Keith

      I apologize, Itch. I was wrong. I just looked through my copy of the book (Rule #1) and it doesn’t say anything about using gross profit for the sales number. I don’t know where I got that. This shows me how I’m really not qualified to be offering advice. In fact, the book refers to “sales” as the “top line” number. So, my advice to you was 180 degrees wrong and I don’t know how to delete my comments. Again, I’m sorry if I’ve done more harm than good, or if I’ve confused matters. I go now. Step away from the keyboard, Keith.

    • Josh

      It is to bad msn changed. It was a very nice pace to get the key 10 year numbers. I always used them when helping people look at companies. It was the best place for free 10 years.