What Makes for a Great Financial Trading Simulator?

What makes for a great financial trading simulator? The answer depends on the aims of the end user. If the simulator is used to test algorithmic or black box systems, then realism is everything. From the system latency to the artificial intelligence behind the simulation or the accuracy of any historical data employed. But when the end user is human with different training goals in mind, realism must be balanced against learning efficacy.

So an excellent simulator will relax the realism constraint under two conditions. Firstly, if the user can learn more by experiencing less-than-authentic scenarios and secondly if the experience is not surreal. In other words, sometimes, realism might give way to exaggeration to emphasize a point or allow for intensive training. This is no different to a golfer practising 100 bunker shots sequentially; in a real game this will of course never happen (although I’ll admit, I’ve come close on occasion), but the over-emphasis is meant to serve a purpose; to focus learning on one aspect of the game. So with a trading simulator, we might want certain events to occur in simulation more often than they realistically would in practice, so as to maximise the user’s training. But this should not be allowed to become surreal. So, a trading simulator ought not to habitually generate scenarios that cannot possibly happen in reality. No golfer practises wood shots on the putting green for good reason. Simulators should never encourage bad habits.

The best trading simulator will not only exhibit realistic scenarios, but also realistic trading logistics. So, a simulated desktop trading environment ought to resemble where possible a real trading desktop environment. Simulation trading interfaces should resemble real interfaces. Simulated risk matrices should bear resemblance to real risk matrices etc. This develops the equivalent of ‘muscle memory’; for example practising the physical execution of trades in simulation should carry over to the live markets.

A great simulator will invoke an emotional response in the user. This is truly important. If the simulation feels throw-away and the user feels only indifference, then this is a failed simulation. The trading simulator must make the user understand the emotional experience of trading financial products and managing a portfolio.

Finally, using a trading simulator has to be enjoyable. The simulator must offer an insight into something approaching the reality of trading and of the emotional and intellectual challenges involved. But only if this is achieved in an engaging manner, can the simulator be considered a completely successful tool.

When learning to trade financial instruments, whether cash or derivatives, using a great market simulator can be an incredibly effective way to improve.