There is an excellent way for investors to try out buying and selling without actually risking money: paper trading. This is, in fact, a straightforward concept, and we’ll be analyzing it in this article.
- What Is Paper Trading?
- Why Should You Practice Paper Trading?
- Types of Paper Trading
- How to Paper Trade
- Paper Trading Pros & Cons
- Paper Trading Tips
- Paper Trading FAQ
What Is Paper Trading?
This term was coined back when traders would practice with paper before risking money on the live markets – this was long before online trading platforms were available. A paper trader will record all of their trades by hand so they can keep track of hypothetical portfolios, trading positions, and profits or losses. Nowadays, paper trading actually uses an e-market simulator rather than paper. These simulators act and look similar to a real trading platform.
Nowadays, many online brokers offer their clients the use of paper trade accounts. This way, novice users can learn how to navigate the platforms and place trades – however, even though paper trading accounts represent real market conditions, they don’t provide the emotions of real trading.
Why Should You Practice Paper Trading?
Paper trading is an excellent way to test out trading strategies and work on building a portfolio – just like you would do when you’re trading for real. If a virtual trading account uses real-time data, its actual performance would be reflected. Plus, if you already have plenty of experience with simple instruments, like options, you can try out more complex trades, such as buying and selling stocks.
You can also save money while trying out paper traders – you have nothing to lose. This gives you the freedom to experiment without stressing over losing money. Paper traders can test out infinite strategies without losing a cent.
Furthermore, paper trading will help traders increase their confidence.
Types of Paper Trading
There are many types of assets that you can practice trading – we’ll take a look at some of the most commonly paper-traded ones.
This is the simplest form of paper trading, in which you identify an appealing stock, recording its ticker, and choosing a time to place a buy order (or a sell order). If you are entering at the beginning of the session, you’ll record the opening price. Otherwise, watch the ticker throughout the trading day and choose a spot that seems like a good entry point.
Options trading might seem overwhelming to new traders, which is why paper trading is an excellent educational tool in this field. An option gives a buyer the right (note: not an obligation) to buy or sell an asset at a set price on a certain date or before that point in time. This can be tricky to time right, but paper trading can help you get the hang of it.
Futures contracts (which are readily bought and sold over exchanges) are standardized, specifying a unit of measurement, how the trade shall be settled, the number of goods to be covered or delivered, the currency unit the contract uses, and quality considerations. As you can see, there are many factors that go into a futures contract, which is why paper-traded futures can come in handy.
Cryptocurrency trades are newer than other forms of trades – because of this, we believe that new and veteran traders alike can benefit from paper trading in this field. You can get a feel for various forms of crypto as you get to know the price of coins. If you want to try out crypto paper trading for yourself, 3Commas has a feature-rich tool in which up to 100 live bot deals or Smart Trades are supported.
How to Paper Trade
Getting started on paper trading is actually pretty easy! If you prefer to go the virtual route, rather than using a pencil and paper, you’ll need to choose a platform, open an account, and then just get started.
Open a Paper Trading Account
3Commas offers paper trading, in which you can test out trading strategies and get real experience – their features replicate real price movements in real-time. There are even simulated fees – 0.1% per order.
To enable 3Commas paper trading, you need to have one of their account subscriptions. Log in and check the top menu bar to see if the feature is enabled in your account. If so, click it, and you can immediately begin paper trading.
If you don’t see it on the menu, head to your account settings, and click “Unhide” under the “Hide Paper Trading” option.
After that, the paper trading option will show up on the top menu.
Start Paper Trading
You’ll receive virtual, simulated funds in your account for trading purposes. To get it, go to the My Exchanges section of the platform.
Click the “View” button on your Paper Account.
Next, click on “+$1000”.
Do that until you are satisfied with the amount of funds in your account – and then get to work on trades the same way as with a regular account.
Paper Trading Apps & Simulators
There are other paper trading apps and simulators available on the web; we’ll take a look at some popular ones.
Ameritrade’s simulator, paperMoney ®, allows users to trade risk-free in a real-time environment. It gives users access to some – but not all – of the features on the “real” trading platform. Basic options, futures, and forex options are available in addition to stocks.
TradingView offers a good paper trading system – however, unlike 3Commas and other options, there is no way to change the account currency from USD to a different type. When you use a Paper Trading account from TradingView, you’ll start with $100,000, and that amount can be reset at any time. You can buy and sell tradeable security on this account mode.
ThinkorSwim has a robust paper trading tool, in which you can trade $100,000 of virtual money risk-free. Unlike some other services, you don’t have to have an existing account in order to sign up for a Paper Trading account.
Paper Trading Pros & Cons
As with any other kind of trading, paper trading has its pros and cons.
- No risk: Paper trading doesn’t cost anything – thus, you can’t waste money if you make poor decisions or have bad timing.
- No stress: Stress can cause feelings of greed and fear – both of which can negatively impact your trading psychology and cause you to take or avoid risks. With paper trading, you can fully focus on the mathematical undercurrents of trading rather than pitfalls.
- Practice: With paper trading, the trader gains experience in each facet of the process – all the way from pre-market prep to taking the final profit or loss.
- Confidence: After making complex decisions that result in hypothetical profits, a novice may feel more confident and prepared to make such decisions when dealing with real money.
- Statistics: When you paper trade for a few weeks, you can build up useful statistics about a new strategy and your market approach. These statistics can show you where you need to focus on next.
- Market correlation: Paper trading is unable to address the impact that the broad market may have on individual securities.
- Slippage and commissions: When trading with real money, traders deal with many hidden slippage and commission costs – and this is often not captured with paper trading.
- Emotional reality: Traders may not experience real-world emotions that would be produced by true losses or profits.
- Formfitting: Paper trading focuses on choosing ideal entries and exits and fail to address obstacles such as predatory algorithms that may come into play with real trading.
Paper Trading Tips
If you are thinking about beginning paper trading, be sure to follow our tips to make it an effective educational tool.
We recommend only paper trading with an amount of funds that you would actually use with real-money trading. This makes the losses and profits more meaningful.
Record Your Results
It’s necessary to keep a trader’s diary of your results – this way, you can see how you improve over time. Track the date, time, R/R, and actual profit and losses.
Analyze All Your Trades
Don’t just look at what went wrong – also analyze successful trades so you can identify what is worth trying again. The end goal is to come up with actionable takeaways.
Remember the Difference Between Real & Paper Trading
Paper trading is an excellent way to combine trading theory with practice, but you should keep in mind that it isn’t the same as real trading. There are more emotions involved with real trading, plus liquidity is a factor.
Develop Your Trading Confidence
Paper trading is an excellent tool to develop self-confidence so that you feel well equipped to make complex trading decisions. Just keep in mind that there is a difference between confidence and arrogance.
Paper Trading FAQ
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