What Is Paper Trading?
Paper trading, also known as demo trading or simulated trading, is a way for traders to practice trading stocks, crypto or securities using “fake money” or “virtual funds” on a trading simulator. This allows traders to learn how to day trade and refine their strategy without the risk of losing any real money, but it also means they can’t make any real money due to using virtual currency.
Paper trading has many benefits, the most notable being that you don’t lose any of your hard earned money, but it also has drawbacks in that you don’t have the emotional aspect involved when you are trading without real capital. Let’s take a look at the details of paper trading and the best ways to do it so you can get the most out of the time you spend practicing trading.
Benefits Of Paper Trading
There are many benefits to paper trading as you begin your trading journey and even as you grow and learn to become an experienced trader.
Risk-Free Practice
The biggest benefit of paper trading is that there is no risk involved. Since you are using fake money and trading on a trading simulator, the only thing you can lose is time. You will set up your paper trading account with the same amount of fake money that you would deposit in real money and then practice your strategy, executing trades, timing them and using take profit and stop loss orders. But at the end of the day, when you lose a trade(and you will lose some trades!) you won’t lose any real capital that you worked hard to earn.
Building Confidence
By using a simulated trading account to paper trade, you can get used to different types of orders for entering and exiting positions, learn how different markets work and act, see how your trading strategy performs and what you need to improve as well as increase your confidence in your trading abilities which will allow you to execute real trades without hesitation when you are ready to trade with real money.
Strategy Testing
Testing your trading strategy is a key component to seeing if you actually have an edge that will help you be a profitable day trader. You should be sticking to your investment strategy and following the rules of your strategy strictly and then making improvements as you learn new things so you can further increase your win rate. Always stick to paper trading when you are testing your strategy or making adjustments so that you don’t lose money when you are in the testing process. Only once you have an excellent, profitable strategy in paper trading should you move on to real trading.
Downsides Of Paper Trading
Although there are a lot of benefits to paper trading, there are also some downsides. Here are some examples of things you will run into that aren’t the best when paper trading.
No Real Money Means No Emotional Rollercoaster
When you are paper trading, you are using fake money, so you won’t really care when you lose. When real money is on the line, it will cause you to experience an emotional rollercoaster until you learn to control those emotions.
Winning trades with real money will make you excited and want to take profits quickly, but that reduces the size of your wins and means your losses need to be smaller.
When you start to lose a trade with real money, you will feel dread and think your strategy doesn’t work. You may even think you need to move your stop loss even further away than normal in an attempt to keep from taking a loss(don’t do that!)
When real money is on the line, it causes you to have emotions and those emotions will affect the trading decisions you make which is one of the hardest parts of trading to overcome. Make sure to use a small amount of money that you don’t care about losing to start with and then gradually increase that until you get comfortable trading with larger sums of money and your emotions don’t affect you as much.
Some Trading Options May Not Be Available
Many trading simulators only offer standard styles of trading for you to practice with such as buying and selling stocks. Most trading simulators won’t allow you to practice trading options contracts, margin trading or futures trading though, so if you plan on trading those with real money, you should find a trading simulator that lets you practice that type of trading before moving on to the real thing. Tradingview paper trading is one of the best options I have found that allows you to practice many different styles of paper trading such as futures, margin and more.
Real Time Data May Not Be Included
When you start paper trading, you will want to trade the same markets that you will be trading with real money, but if you are trading futures contracts or will be trading using an exchange that charges extra money for real time data of their markets, you won’t be able to paper trade those markets unless you pay for their real time data fees which can be quite high for some exchanges.
Slippage And Fees
When you are paper trading, many trading simulators don’t factor in slippage on orders as well as calculate fees for the number of contracts/shares you are purchasing. Most markets that you trade will have some sort of slippage, which is the difference between the price when you place an order and the price it gets filled at.
If there is a gap between those numbers, your order will get filled where the next available order was, but many trading simulators don’t take this into account so your results will be slightly different when trading in real life. Fees must also be taken into account for each trade.
Most brokers charge a fee per share or per contract that you are trading, some even charge for opening and closing trades so you have to take that into account and unfortunately the trading simulator you are using may not account for those or be accounting for them at a lower rate than what you will actually be paying when you start trading with real money.
What You Should Practice With Paper Trading
Paper trading is a way for you to practice trading, so don’t waste the time you spend doing it. Make the most out of it so you can hit the ground running when you switch to real trading.
Patience And Discipline
One of the hardest things to do in trading is having the patience to wait for good trade setups to form before entering positions and having the discipline to only trade the exact setups and conditions that your strategy calls for.
When you are paper trading, make sure you practice waiting on the right trade setups to form before placing trades, keep yourself from breaking your strategy rules and always be as disciplined as possible. This will help you engrain that type of behavior into yourself which is a requirement if you want to be a profitable trader with real money.
Testing & Improving Your Strategy
Use the paper trading features to test your strategy, find areas where it could be improved and then test those improvements. This will save you from making changes with real money that aren’t actually beneficial to your trading journey. Every strategy has downsides and you can tweak your strategy until you get rid of as many drawbacks as possible, just make sure to do it with fake money before you enable that change to your real money account.
Trading Different Types Of Market Conditions
The markets change constantly. One day they will go up like crazy and then the next they will just go sideways. Some days they will be super choppy and whipsaw back and forth. You need to train yourself to be able to identify which conditions you are trading in and then either adjust your strategy accordingly or wait until the ideal market conditions present themselves. Paper trading is a perfect way to practice doing exactly that.
Tools and Platforms For Paper Trading
There are multiple different platforms you can use to demo trade such as WeBull, Charles Schwab and Tradingview. They all have their own pros and cons, but we build indicators for the Tradingview platform, so that is the one we have experience with and it has plenty of features to give you a solid foundation to practice with.
Tradingview Paper Trading
Tradingview paper trading can be accessed by clicking the trade button at the bottom of your chart and then choosing the option called Per Trading. From there, set your account starting balance at what you would trade with in real money and start practicing. They have a whole bunch of features you can use to practice all types of different aspects of trading. The thing we like the best about it though is you can trade straight from your charts that you have your best Tradingview indicators on, so you won’t need separate screens to do your technical analysis and trade from.
Transitioning From Demo To Real Trading
Once you have nailed down your strategy and are profitable and comfortable with how you trade, then you can move on to trading with real money. But there are a few things you will need to be careful of when you make that transition.
Controlling Your Emotions
The biggest difference you will notice right away when you transfer over to trading with real money is that your emotions, anxiety and every other feeling you can imagine will be much more intense than they were during demo trading. You will need to learn how to control your emotions and become a calm and disciplined trader that executes trades without fear if you want to be a profitable and long term successful trader.
Sticking To Your Plan
Now that the emotions are involved, it can be hard to stick to the plan and specific trading plan that you nailed down in paper trading. But you need to remember that you have a plan, you tested it and it was successful, so all you need to do now is execute that plan exactly the way you did in paper trading. If you start changing your strategy and doing things differently, you will more than likely fail and start to lose money very quickly. So always stick to the plan.
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