This stock market simulator is a basic simulator designed to prove the concept described in The Stock Market Game essay – namely, you don’t have to be a good ‘stock picker’ to make money in the stock market.
As you can prove to yourself by use of the stock market simulator below –
To make money in the stock market, you need to follow only two rules:
- Minimize your losses (‘Cut your losses short, let your winners run’)
- Divide risk equally between trades (‘money management’)
HOW TO USE THE STOCK MARKET SIMULATOR
- Enter a dollar value under box A. “Total Portfolio Value”
- Press ‘Enter’
- Enter a limit value under box B. “Limit drop to ___%” to represent the percentage loss permitted.
- Press ‘Enter’
- Repeat 1 & 2 above with different values between 10 and 25%
WHAT TO OBSERVE
- Note and copy the value of the portfolio and percentage change in the control mode (Box C.)
- Note and copy the value of the portfolio and percentage change after different limit values of acceptable loss (Box C.)
INTERPRETATION OF OBSERVATIONS
This basic stock market simulator is set to randomly generate changes of up to 100 % up or down when the table re-calculates its numbers.
In the control (‘normal’) mode: You potentially can lose all your investment (100%), and the results you get may be more or less than your original investment depending on the increase or decrease in the value of the individual stocks. This follows the so-called ‘Random Walk Theory’ of stock market movement, which essentially implies that no one can forecast the movement of individual stocks.
In the Testing mode: By limiting your losses, you will notice that the percentage gain of your portfolio will increase. However, there is a limit to how ‘close to zero loss’ you can achieve, as stocks normally ‘bounce around’ even if they are trending up. Placing your limit too close to the stock price will cause you to exit your trade too soon.
For more detail about understanding the above principle, read The Stock Market Game.
To test the above principle with real market data using historical stock prices, consider a trial of VectorVest, a great stock market simulator program. VectorVest has a huge database of historical stock prices and a ‘back-testing’ feature, which allows the DIY (do-it-yourself) investor and trader the ability to go back into the past and ‘test their strategies’ to determine whether the trading system they wish to follow is sound and will generate profits. I use VectorVest to manage my watchlists, and test trading strategies like the one above.
It is important to remember that picking stocks is only the first step for successful investing and trading; one has to know how to play the ‘Stock Market Game’ in which asset allocation and risk management are crucial. Picking the ‘right’ stocks without attention to the details of asset allocation and risk management will result in sub-optimal results or even losses!