How to Start Paper Trading
Paper trading allows investors to do trade without risking their money. If you want to learn the details, this guide is for you.
January 24, 2021
How to Start Paper Trading And What Are the Pros and Cons?
Investing
in the stock market is one of the lucrative investments for ages, but there is
a considerable risk associated with it. One wrong decision can cost you all
your investment. So you have to be cautioned before buying and selling shares
of any company. As it is said that practice makes a man perfect, so same is the
case if you want to trade stocks and futures trading. The
more you practice, the more you will learn the best strategies to get maximum
investment return. For this purpose,
paper trading has been introduced to get trading experience without risking your
real money.
What is Paper Trading?
Paper trading is also known as demo trading. The term paper trading is used for a simulated stock market where you can buy and sell shares, forex, and CFDs, etc., without investing money. It is called paper trading because initially, the traders used to practice the stock market trading on paper before investing their real money in the actual stock market, but after the technological advancement, paper trading is done through electronic stock market simulators. In paper trading, the aspiring traders consider a hypothetical trade and take their position according to the situation. For instance, they can sell shares, buy shares, expand their portfolios, etc., in paper trading. Once they are done with the paper trade, they analyze the trade by making profit and loss statements and evaluating their strategies.
In short, paper trading is there to improve the traders’ trading skills before they embark on their fortune in the real stock market.
How does paper trading work?
The paper trading works like the real stock market, but the only difference is the ash. In the real stock market, the trade is made with real money, while in paper trading, virtual cash is used for trading. The learner chooses a ticker, note down the entry point. It can be the buying price (if the learner wants to buy the shares) and the selling price (if he intends to short the shares). But before starting paper trading, you should do your research, learn as much as possible about the different trading strategies and techniques. Based on the study, devise your trading plan and determine your investment goals. After the learner enters into the trade, he will check the charts and the ticker position during the trading day and decide when to exit the market or how long to hold the position. Whatever strategy the learner adopts, he will analyze the progress and determine whether the trader is on the right track at the end of all this process.
Advantages of paper trading:
There are many advantages of paper trading some of them are:
- There is no real money involved in paper trading. You can try different strategies and techniques to learn trading without any fear of loss.
- As money is not at stake so the traders can trade without any stress. Your wrong decision will not cost you anything, and your whole attention will be on the learning process.
- Te paper trading provides you an opportunity to practice all the elements of trading. From the pre-market analysis to the final trade and then the trade’s profit and loss analysis. It helps the traders understand the financial market, technical charts, spreadsheets, market volatility, index direction, etc. Paper trading gives the traders confidence to try different trading plans before they put their money at risk.
- Paper trading is useful for learners or aspiring traders, but it is equally beneficial for experienced traders. Many professional traders go back to paper trading if they struggle with any situation or want to try a new strategy or a trading plan.
Disadvantages of paper trading:
There are some disadvantages of paper trading as well. Some of them are:
- When dealing with real money, usually, the greed and fear feelings influence the traders’ decision. These feelings are absent in the hypothetical trading situations and do not teach the traders how to deal with emotional instability in the real world.
- One of the significant disadvantages of paper trading is that it does not involve the hidden costs and commissions involved in the real stock market trading.
- Paper trading does not address the issues arising from the rise in the market volatility index (VIX).
- Most of the time, the paper trading accounts do not use the latest information, and the traders do not get insight into what is currently happening in the share market.
Most professionals believe that paper trading advantages outweigh its disadvantages and that paper trading is a perfect training tool for new traders.
