What is paper trading?
The various trading markets attract many new traders, some of whom are long term traders whilst others are looking to make shorter term trades. Common to all new traders is some understandable hesitation and concern at losing money from their trading.
Whilst any type of trading has its risks, brokers offer a variety of tools to help first time traders to improve their online trading skills. One of them is called “paper trading”, although you are less likely to hear the term, being a term for what is known as trading on a demo account. The term ‘paper trading’ comes from the stock exchange market, where investors who wanted to practice would write their investments on paper and follow the market movements.
What are the advantages of Paper Trading?
Trading without the risk
Demo accounts are widely used by first time traders who want to practice and learn how to trade before they trade with real money. Other users of paper trading/demo accounts are by more experienced traders, who want to test new strategies or practice on new trading channels, learning about the market, and most importantly – learning about themselves as traders. Needless to say, this is a very useful tool in the trading world.
Using a demo account allows first time traders to experience and trade with an account that looks and acts similarly to the real online trading accounts traders use. Demo account users receive an amount of virtual money in the beginning, and can start trading by opening selling and buying positions. Just like a real account, the demo account shows market movements on the traders’ screens, so they can decide if they should continue their trade or get out. At the end of the day they can assess their actions, learn from them and get ready to start trading in their real account. For demo account users it is not only important to practice on demo accounts, but also look back at their actions and learn from them. This is also important for more experienced traders, who want to practice on the demo account for any reason. They need to check if their trades are as successful as they hoped at the end of the day.
What are the disadvantages of paper trading?
However, there are some risks to paper trading which should not be ignored. Some people would advise not to begin trading with a demo account for a number of reasons.
The main one, according to them, is the sense of euphoria paper trading can give. Since there is no real money being used, traders can take risks that they otherwise wouldn’t, thus expanding their profits. A case of money loss, on the other hand, is often not taken very seriously since, it’s not real money that’s being lost. There is another disadvantage; since it’s not their money they are trading with, they won’t always follow the market and respond as they would if it was their own money.
Some demo accounts do not use exactly up-to-date information but delay it by 15-20 minutes, so the data is not used by competitors. Others display fake data, but the main goal remains the same – to get traders ready for the Forex trading online market. On the AvaTrade demo account the information displayed is in real-time and projects the accurate rates. The tool is very common and used worldwide by brokers on all types of markets – Forex, stocks, bonds, commodities etc. Due to the fact there is not real money that’s been put in, it’s often called “Paper money”, “Monopoly money” etc.
Should you use paper trading?
At the end of the day, should first-time traders use paper trading? Should they open a demo account before trading in the real market? The answer is yes, as long as they remember how to work with it properly. A few simple guidelines would dramatically increase the effectiveness of a demo account.
Treat it as a proper real account
This will not only overcome the main obstacle of demo accounts, but will ease the transition from demo account to real accounts. Paper trading might seem easy, but there is an important part missing. Real trading involves a lot of emotions, which can be a plus since trades are more involved and invested. But this can lead to negative consequences – emotional trading, with no real thought or research and ending with money loss. This is usually not part of trading with demo accounts due to its nature, and as long as this difference is remembered and taken into account, the transition from demo to real will be more successful.
Learn as much as possible
It is highly recommended to practice on a demo account, whilst reading up on the articles and educational blogs concerning the markets you wish to trade. Once you’ve got a good understanding of the trading platform and the markets you wish to trade on you’ll be better prepared for the real market. We recommend using the demo account for a couple of days, while simultaneously reading relevant materials, and then start trading while it is all fresh.
Finally, trading does not suit everyone. Many times people rush to trade, without understanding the platform or market ending up in disappointment, not to mention the loss of money. It is highly recommended to open a demo account to practice first, and to use paper trading as a mirror to one self in order to answer the following questions – am I ready to trade? Is this market suitable for me? If the answers are yes, it is time to open a real account!
Paper Trading main FAQs
- Why is paper trading important?
Paper trading gives you something approaching hands-on experience, which is far more valuable than simply theoretical knowledge. You can be a genius with theoretical knowledge, but when faced with the pace of movement in real market trading environments you could freeze-up and fail miserably. So, paper trading can teach you valuable lessons about real-world trading that you can’t learn from other sources. And while paper trading won’t fill in all your learning needs it is one zero-risk method for improving on your trading.
- Who can benefit from paper trading?
Paper trading is considered to be very useful for new traders, but in truth it can benefit anyone, even professionals use paper trading when they are developing a new strategy. And while you might be impatient to get to trading with real money, the benefits to be gained from paper trading are incalculable. Taking the time to test your trading strategy with paper trading could mean the difference between a profitable trading career, and a huge disappointment. Paper trading can also help remove the emotions from your trading since you aren’t risking real money.
- How can you get the most from paper trading?
Paper trading without a plan isn’t going to help you much in the long-run. You have to treat your paper trading just as carefully as you would handle real money trading. That means instead of starting with the $1 million demo account you’ll likely be faced with, you should start with a realistic amount of money in your demo account. That might be $10,000 or it might be $1,000. Then you need to record everything about your trades. Why you took the trade. What your exit target is and why. What actually happened with the trade. Afterwards you can go back to determine how you might have made the trade more profitable, or less of a loss.