It is only a matter of time for a newcomer to realize that the stock market is unpredictable and vast. As a beginner, it is usually tough to navigate such fast-paced settings.
If you are new to this trading world, it is highly essential to learn the basics before you move on to investing your hard-earned money in the market. With the advancing technology, there is a way to do that, known as ‘paper trading‘.
What is Paper Trading?
It is the art of trading in a completely virtual environment without investing money in the stock market. This investment in the market is separate, and whatever is traded or moved here will not affect the real money and the stock market. It restores the real-world price movement of stocks and allows the traders to trade using virtual money. This trading method also allows you to test out the trading strategies in the real world market, setting to measure the success or failure of the strategies without putting your actual money at risk.
The concept of paper trading is not new to traders. Although because of the modern simulation software, it has been around for a long time and is constantly improving. The term ‘paper trading‘ originated with the traders manually writing down the trades they wanted to trade on paper and then manually following the trend until the point of closeout. Over time, it has evolved to simulate a more real trading experience and portfolio side-by-side of actual trading.
Paper trading helps build insight and improves skill set at every step in the trader’s journey.
How can you Paper Trade?
One of the most simple and basic approaches to identify an appealing stock with the help of a chart on the company’s website or any analysis by any market personality. The trader needs to write down the ticker and choose a time to buy or sell the hypothetical order. The trader needs to jot down the stock’s opening price in case he is entering at the start of the session; the next step is to watch the charts and ticker during the trading day, including picking a spot that looks like a good entry. This price and time of entry vary considerably depending on the basic tutorials used to learn the trading game. This also holds during the stock management phase, where the place to stop is to be decided and how long to hold this position.
After the decision, an exit price is finally written down, and the trader repeats the process until enough data is collected to analyze progress. While the method of paper and pen works perfectly for paper trading, spreadsheets provide an easy and powerful tool for detail-oriented individuals as they have an option to add additional columns to capture the data.
Another option of the trade simulators is also there. It offers a more assertive approach to paper trading as they allow the traders to set up their workstations that copy actual real-time market conditions.
Advantages of Paper Trading
Now, as we have learned about the concept of paper trading, let’s look at the advantages that this trading offers:
In the process of trading, mental stress levels play a huge role. When a trader is new to this practice of trading, emotions like fear, greed, and stress usually take over, leading towards the trade that doesn’t usually go according to the expectations. Good practice and experience can help one learn to keep the emotions and stress levels in check and have a more objective view of the trading.
Since only virtual money is involved in paper trading, the trader doesn’t have to put his hard-earned money at stake to practice trade. Paper trading thus helps eliminate any risk, allowing the trader to take bold trading decisions with more confidence. Eliminating the risk of losing your money on bad trades, the trader will be better positioned to learn and practice the art of trading in the stock market.
Making complex decisions and getting awarded hypothetical profits is an excellent step in building the trader’s confidence. It also motivates them to act in the same way when their real money is put at stake.
Practicing paper-trading for several weeks to a month helps build practical new strategies and market approaches. These new strategies can be used when the trader’s real money is put at stake.
Disadvantages of Paper Trading
Paper trading is an excellent way to learn, but still, it has some disadvantages. Let’s now look at the other side of the coin.
The method of Paper Trading usually fails to address the broad market’s impact on the individual securities. The equities move in lockstep with the other major indices during the period of high correlation, and it is common when there is a rise in the VIX (Market Volatility Index). This result might look excellent or terrible on paper; some broader conditions might have created this result instead of the pitfalls or virtues of the individual positions.
As virtual money is used in this process, at times, no attachment is felt in this activity. This leads to taking more risk when compared to the risk with real money. There is also a slight chance that the trader might not take the losses as seriously as he would take when real money is involved.
Other costs ignored:
In paper trading, the trader can practice trades, but it doesn’t consider other costs. Other expenses such as fees, commissions, taxes, and many others are also included in the real world. These expenses can drag down the profits, and paper trading does not prepare a new trader for these additional expenses.
The questions that arise now are that if a first time trader should get involved in paper trading? Should an inexperienced trader open a demo account before he enters the real market?
The answer to then is a big yes; the main thing to remember is to use these platforms to their best effects. It has grown in the past few years and the meaning of Paper Trading is buying and selling stocks with the help of virtual money. Practising with this money helps the new traders to practice navigating the trading platforms without putting actual capital at risk.
This kind of trading is perfect for beginners trying to start trading or even for the experienced ones looking for something to test out their new strategies.