The Benefits of Paper Trading

Paper trading is a simulated market environment where traders can buy and sell in a "fake-money" environment rather than placing real money orders with a brokerage. The process can be simple. New traders likely need to paper trade until they learn fundamental strategies and dynamics of options trading. Many advanced traders also utilize paper trading when developing new ideas and approaches.

Paper trading is not a new concept. Though some of the steps in modern simulation software may seem like they belong in high-tech virtualization, paper trading has been around for a very long time. The origination of the term "paper trading" comes from traders manually writing down on paper the trades they want to trade and then manually following that trade until the point of closeout. Paper trading has evolved substantially to simulate a real trading portfolio and experience side-by-side actual trading.

Paper trading can vary from a simple notebook that contains buy-and-sell decisions to a complex system with scanners, software, and expert advisors. In this article, we will review some of the many benefits of paper trading.

Using Paper Trading is a Critical Tool for New Traders

Although trading can be a fun and exciting endeavor, it can also be a complex process that can feel overwhelming for beginners. In fact, a lot of traders who are new to the stock market may not realize the true value of starting out with paper trading and learning in real-time rather than just 'reading up' without actual doing trades.

You must understand that paper trading can allow you to learn and practice in a safer environment while avoiding the pitfalls of risk and price volatility. It's the opportunity to trade a collection of stocks, options, and equities without risking the actual money that you work hard for every day. 

Paper trading can be one of the most important aspects of a trader's education. A beginner who relies at least partially on paper trading to build skills will know whether they will be successful with real money. Some benefits come from making a simulated trade, including discipline. It makes a difference when you have real money on the line, and your emotions will run rampant if you lack the proper composure.

Feeling Out the Market Using Paper Trading and Without Risking Your Capital

Paper trading is a misleading term. In reality, this process should be renamed as "simulated trading" since as there is no real capital at risk while conducting a paper traded portfolio. However, paper trades are critical in developing the foundation for your trading — and it all begins with mindset.

The idea of paper trading is to remove the biggest obstacle to learning - the capital risk that a new trader faces. It is easy to change your mind, work out new strategies, and not make any money when it's all on paper. Of course, doing that with real money becomes harder. But if you start making real trades while still learning, you're more likely to lose money and give up. There's no quick fix to becoming a successful trader, and as long as you give yourself a genuine chance to become one, there are some significant advantages to paper trading.

For instance, especially if you are a novice trader, you want to understand using a primary technical analysis indicator like the 50-day simple moving average or 10-week MACD. You can study this TA in a simulated environment following the trading vehicle during a real-time live session with paper trading. They enter the trade when they believe entry conditions have occurred as defined by their research and check for sufficient volume (assuring a liquid market).

The reduced cost and risk appeal to people new to the stock market and looking to test new strategies. However, accurate paper trading is generally verboten by brokerage firms and other entities that set you up with an account. Instead, they want you to put money in the game to learn from your mistakes in the safety of a simulated environment.

Moving from Paper Trading to Live Trading

As you read this, you have to ask yourself, why do I trade the market? Is it to beat an index? Grow my account balance? Paper trading is usually a free tool for you.

It's all about having fun in the markets and practicing trading. We recommend utilizing paper trading as a vehicle to see how a strategy might work in the markets and to learn more about the nuances of a particular asset or trading strategy. The primary difference, aside from the money at risk, between paper trading and live trading lies in the way trader psychology. Without money at risk, paper traders may take on more risk than they would if actual capital was at risk.

Once you have a good streak of winning trades and you feel comfortable with your trading approach, take your strategy and see how you react, adjust, and earn your real money in the market. Be sure to follow money management guidelines to ensure you manage your risk exposure.

Summary: The Benefits of Paper Trading

Paper trading, or "simulated trading," can be a very cost-effective way to learn how to trade stocks, options, and equities without risking real money. It does not cost anything to open an account and trade virtual or digital. If you have never been an intraday trader, paper trading is a great way to get your feet wet for nearly zero risks. It gives you the ability to try new trading strategies and see who works while giving you a chance to feel the market speed and pressures.

Paper trading is an ideal learning opportunity. Using real market data and fundamental factors to make decisions will help you understand how the market works and improve your overall knowledge of trading. Sophisticated, easy-to-use trading platforms have a wide range of unique features like social trading, paper trading, and electronic tools to help you analyze stocks.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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