Investing in the stock market can assist you in developing a portfolio and building wealth. But a particular volume of risk is involved when buying stocks and other assets. So, if you’re a new investor still learning the market fundamentals, Paper Trading is something you might consider.
Although it may sound complex, it entails creating theoretical trades on paper without putting them on the market. Paper Trading is relatively easy, though it has some advantages and disadvantages to bear in mind.
In this article, I will walk you through what paper trading is, including but not limited to the upsides and downsides of this trading system, to help you make a pre-informed decision about whether it is right for you.
Ready to uncover it? Let’s get started!
What Is Paper Trading?
There are several kinds of traders, including short-term and those maintaining open positions for an extended period. Hesitation is common to all new traders when placing trades and worrying about losing money.
While all trading types come with risks, brokers provide various tools to assist beginner traders in boosting their trading skills before risking or committing actual funds. One of these instruments is called “Paper Trading,” although you are less likely to hear the words since it is used in Demo trading.
Now, what is Paper Trading exactly?
A paper trade is an imitation trade that enables an investor to practice trading (buying and selling) without committing or risking actual capital. This is done by writing the trade on paper, which gives birth to the term “Paper Trading” instead of placing an actual order via a brokerage. And then follow the market movements to see if the ideas worked out.
Paper Trading is frequently used in a formal setting. It is what we in the CFD, Deriv, or Forex trading industry refer to as Demo Trading. The term Paper Trading dates back to when (before online trading platforms became popular) intending traders would use paper to learn or exercise before risking funds in live markets.
While practicing, a paper trader puts all trades into records by hand to monitor theoretical or supposed trading portfolios, positions, and returns or losses. Currently, most practical trading encompasses an electronic stock market emulator, which seems like a real platform.
This article will not be complete without weighing the upsides and downsides of the trading system, just like every other trading form. Evaluating the pros and cons will let you know if it could benefit your investment strategy. Let’s examine some of the pros below:
- No Capital Risk
Paper Trading does not cost or involve trading capital, and you do not lose your capital. There is nothing like the fear of missing out (FOMO) due to poor trading decisions. Paper trade of securities assists beginner investors in learning the trading and getting the view and feel of the security market.
One of the crucial roadblocks involved in beginning trading is the fear of losing capital, commonly known as FOMO. The practical platform offers you the ability to perform trades without any fear. You can learn various investing styles and discover which strategy suits your business. Also, this platform lets you compete with other traders and evaluate your performance.
2. Ability To Make Mistakes
The ability to make mistakes can sometimes be the most significant upside of all. Paper Trading enables you to commit an error and learn from your past with no trading capital at risk. Of course, every investor makes mistakes while trading and takes wrong calls, but our ability to learn from those mistakes will lead us to our most significant achievements.
3. Developing Trading Confidence
As mentioned above, Paper Trading has many benefits and is broadly used by new traders who want to practice and learn to trade before trading with actual money. More skilled traders use it to test-drive a new platform or test out the strategies they haven’t used. For new traders, it is a great way to learn about the market and, most significantly, understand yourself as a trader.
And once you’ve successfully paper traded, it will help build your confidence to finally perform actual trade with the platform and strategies you’ve tested.
4. Developing Strategies
The ability to test different strategies is another plus for Paper Trading. Paper Trading also allows you to test if a new trading strategy works from growth, options, momentum, value, foreign, and mutual funds. All have pros and cons, and the simulators enable you to uncover them without risk.
Most investment is analytics, and practical trading offers the scope to experiment with the trading and discover the strategy that fits your style.
Disadvantages Of Paper Trading
Nevertheless, as mentioned earlier, some risks associated with Paper Trading should not be overlooked. Some people would recommend not starting with a demo account for a few reasons. Let’s examine the disadvantages to consider when paper trading:
- Euphoria Trading
The sense of euphoria in Paper Trading can be one of the biggest cons of this trading system. For a beginner trader, Paper Trading in simulated settings without committing or risking actual capital feels very different from an actual account situation where an actual fund is at stake. With demo trading, the mental features of trading, such as fear and greed, don’t come into play.
As no real funds are involved, an individual may perform trades and take the risk they won’t do with a regular live account, thus increasing their profits. Also, because their money isn’t involved, they won’t constantly follow the market movement and react as they would if it was their real money.
2. Emotional Reality
There is a clear difference in a trader’s emotions when trading on the live account because of a lack of capital risk. Paper Trading doesn’t induce emotions one would feel when genuinely trading.
Other disadvantages of Paper Trading include the following:
- Trade slippage and commissions
- Delayed Data
Paper Trading offers a learning platform for beginner investors to practice different trading strategies and make decisions. Such as when to enter and let go of a trade, such as choosing assets, entry, and exit points. As such, Paper Trading is an excellent way to start acquainting yourself with the markets. Also, how to perform trade if you’ve not traded before.
Also, skilled investors can benefit from Paper Trading when investing in more speculative assets, like options or futures. Whether you select to paper trade online or by hand, it’s worth noting that it is assumed or imaginary. Your actual-world trading outcome might also turn out differently.
I believe you know what paper trading is now, and you’ve decided whether you want to explore it or not. And to begin your trading journey or test your trading strategies. Happy trading!