Doesn’t everyone just love a happy ending? Reading stories about traders who became millionaires overnight by trading in stocks, or how someone is earning twice their normal income on the side? Just makes one want to jump into the stock market immediately!
Lesser known, however, is the stories of financial ruin, mental anguish, and wasted time – from people who didn’t understand the nuances, risks, and preparation required in trading. The seduction of the stock market can prove to be a very costly mistake. The stock market is a labyrinth, where going without preparation can be unforgiving.
Technology has advanced to a point, where it can provide a simulation for almost everything. From cockpit simulation, driving, augmented reality, to VR software. Similarly, simulated stock trading or paper trading can provide the same thrills without losing a dime.
What Is Paper Trading?
Paper trading provides you with a virtual or simulated account that looks and feels just like what you would expect from your brokerage account. The term paper trading originates from the time when traders would write down their trades on paper and manually compare it to the stock market at the end of every trading session. It was a popular way to practice trading before the advent of electronic trading platforms.
Paper trading mimics the real-world market values and price movements of stocks and other financial instruments. The trader only uses virtual money and thus has neither real risk nor reward from their virtual trading portfolio. Thus, a paper trader trades stocks with real numbers in real-time, using pretend money.
What Are The Benefits Of Paper Trading?
If there is no risk or reward, why would anyone use paper trading? Paper trading has many benefits, especially for people who are new to trading or want to understand how the stock markets work in real-time. Listed below are some of the benefits which paper trading provides to investors:
One of the most popular methods to understand and see if your strategies work is called backtesting. Backtesting assesses how successful your trades would have been using historical market data. If your model was successful, then you would be confident of using the same, going forward.
Quantopian is one such popular online algo trading method, which provides a great backtesting environment for testing and sharing trading ideas with other similar investors.
Powerful Learning & Sharing
You can connect your paper trading account to Tradingview to get real-time information and market insights. You can do all your research from a single platform via simple and easy browser-based charts, without requiring complex modeling setups.
With many active investors available, it becomes an ideal platform for sharing, discovering, and learning great insights and trading strategies. Today’s algo trading platforms provide state-of-art tools to capture and follow market movements in an intuitive setup.
Trading platforms also let you become comfortable with the tools and tricks available to you, gearing you up, to tackle real-world complications with ease.
Eliminates Stress & Risk
You can begin to trade immediately, knowing very well that your hard-earned money is not at stake. You can lose virtual money and still go to bed at night, without the stress killing you. Trading in the real world comes with a lot of stress, which can be mitigated in a virtual trading scenario. This ensures that you make better decisions with a clear mind.
A paper trading platform is ideal for newbie traders to understand, learn and mimic trading techniques without getting exposed to real risks and loss of money.
How To Begin Paper Trading?
Do not engage in paper trading like you would with a game. The idea is to gain the maximum knowledge of real-world transactions. Be prepared with a detailed trading plan, with goals in mind. Do your research, learning as much as you can before devising a strategy to try. Do not treat paper trading as a frivolous activity, as this will eventually replicate your success in real trading. Understand when you would like to enter and always be prepared with an exit strategy.
Risks Involved With Paper Trading
Even when using a risk-free paper trading account, there is a word of caution. Although paper trading platforms simulate market movements, the data feeds might lag real-time data by up to 15 minutes or more. You might not be as connected to your paper trading account as in the real one, since no real money is involved and get sloppy in picking your stocks. One also needs to be aware of the fees and commissions charged in the real stock markets.
Owing to the proliferation of online trading accounts and platforms, paper trading has seen a surge in popularity, with almost all broking firms offering some form of paper trading. All said and done, paper trading is by far the best way to understand how to trade with minimal loss.
Always remember, trading is not just hitting the ‘buy/sell’ button on your keyboard. To be successful, you need to have discipline, perseverance, knowledge and as always, a little bit of luck! Happy trading!