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Paper Trading, its Perks and Drawbacks

Paper trading has become a regular offering in the financial world with many brokers offering paper trading services to their customers. However, as a trader, you need to know what it is and how it compares to live trading assets.

What Is Paper Trading?

A paper trade can be defined as a simulated trading process that allows a trader to practice buying and selling assets without risking real money. While paper trading is usually offered in demo accounts today, the term started before online trading came into existence. Aspiring traders would practice on paper before using real money in the live markets. During the practice period, the trader will record the trades on a paper to track the possible trading positions, profits, losses, and other metrics. The emergence of demo accounts and electronic stock market simulators makes paper trading feel like an actual trading platform.

Reasons for Paper Trading

There are various reasons for traders of all skill levels to use paper trading....

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How to Trade Stocks After Hours

how-to's Aug 31, 2020

Prior to 1991, US stock markets were only open between 9:30am and 4pm (EST) and that no-one was able to trade outside of those regular trading hours (RTH), also known as standard hours or day session.

“Beginning in mid-1999, increasing numbers of broker-dealers began offering their retail customers the opportunity to direct their orders to ECNs so that the orders would be eligible for execution after the regular session close. These developments promised retail investors some of the same flexibility in after- hours trading that institutions and professional traders have had for years.”

https://www.sec.gov/news/studies/ecnafter.htm

Those looking to trades stocks outside of RTH would have to either sit and wait, or engage in foreign markets, typically in Asia to take advantage of the time difference. This time restriction made it hard to bridge between full time work and being an at-home stock trader, which is why the extended or after-hours trading session makes the...

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How to Become an Active Day Trader

day trading how-to's Aug 19, 2020

The ability to work from home, set your own hours and use your money to generate further income are all big drivers for people to learn how to become a day (active) trader on the stock market. Whatever your motivation, you can learn trading from the comfort of your own home at your own pace, which means that it can start out as a side hustle that you can turn into something more substantial as you get the hang of the different systems. However, it will be essential to take part in at least a beginners online stock course so you know what you’re getting yourself in for and can plan your way to success.

Steps to Success

Day trading sounds like the ultimate dream job; work from home or wherever there’s an internet connection, and maybe even get your computer to do most of the work for you. It can feel surprising to newcomers that there aren’t more success stories of amateur day traders making big money, but with the right preparation, it’s possible for you to...

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How Pair Trading Works

We recommend reading What is Pair Trading before the rest of this article.

 

We think of the combined stocks as a “unit”.  We can either be Long or Short the unit or the pair.

If the pair we chose was XOM vs XLE and we always kept XOM as the first symbol and XLE as the second symbol, then we could combine them as XOM/XLE (ratio) or XOM-XLE (differential).  We would say we are “Long the Pair” if we were long XOM and short XLE.  Conversely, we would be “Short the Pair” if we were short the first symbol (XOM) and long the second symbol (XLE).

There is no correct way on how to structure the pair, but rather it is trader preference.  The key is to choose what works for your trading and data platforms, as well as the time frames you are trading in.
For someone who wants to hold overnight, it could look different than for the day trader.

That being said, we have our preferred method and style of setting up and naming a pair. More...

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What is Pair Trading?

The concept of pairs trading, or relationship-based trading, comes from Morgan Stanley, where a group of researchers first developed the strategy in the 1980s. Simply put, pairs trading requires you to match a long position against a short position on a pair of stocks that are highly cointegrated.  There may also be high correlation as they track together through market fluctuations. Once you find the some great pairs to trade, it can be a very effective trading strategy, insulating you from the market gaps, reversals and overall volatility, but tracking, executing and managing the combinations takes knowledge, time, skill, historical and current data.

Benefits of pair trading

Relationship-based trading helps to identify probability and predictability.  Volatility increases your chances to take trades over and over again increasing production on a pair or portfolio of pairs.  You may be able to identify the leading stock and the stock that lags.  This will assist...

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Secrets of Stock Market Millionaire Jesse Livermore

trading chronicles Mar 26, 2019

Jesse Livermore was born on July 26, 1877 in Shrewsbury, Massachusetts. When Jesse was 14 years old, he ran away from his father’s farm and started working at a brokerage posting stock quotes. Excelling in mathematics, he quickly gained a feel for the markets.

A year later, at the age of 15, he started putting his theories to the test. With very little capital to use at his young age he started placing wagers at his local bucket shop. A bucket shop was a gambling house for stocks where participants could bet on the direction of any stock. Jesse quickly made his first $1000 (the equivalent of $27,000 today) and quit his day job at the brokerage. He made so much, however, that the bucket shop owners grew tired of handing over their money to Livermore and permanently banned him from their establishments.

By then Livermore had made more than enough to try his hand in the actual stock market.
He found his bucket shop strategies ineffective in the new environment and went to work...

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