What Is Paper Trading and Why Traders Use It

Thu Sep 24, 2020, 01:31 pm | by Delaney | No comments

If you’re new to trading, you might have heard about paper trading. It’s not necessarily done on paper anymore, but used in a simulation, usually offered by a broker or market-related company. This blog post will break down paper trading, and the pros and cons of using it.

What is Paper Trading? 

Paper trading is a simulation that allows you to practice trading or investing without the risk of using real money. According to Investopedia, the term paper trading comes from when traders would “practice on paper” before risking their money. Now, you can practice online instead of on paper.

Paper trading records all your trades as if they were real, so you can practice before getting into the markets. This is great for new traders, or if you’re looking to test a new strategy.

There are many services you can use to paper trade, and your broker may even have their own paper trading simulation.

Why Use Paper Trading? 

The biggest pro to paper trading is the ability to practice and find your strategy with day trading. It’s a great way to test it out, and see how your trades may have done in the markets. Many brokerages offer paper trading with a very similar experience to how you would actually trade using their platform. If you know you are going to use a certain broker, you should use their paper trading system if available. 

Paper trading allows you to gain confidence in your trading, while focusing in on your strategy instead of emotionally trading. 

If you’re an established trader, you can still use paper trading. It’s a great way to test out any new strategies you want to implement.

Cons of Paper Trading 

There are a few cons to consider for paper trading.

One, you may experience fear of missing out, especially when a paper trade goes particularly well. 

The second con is since you are not risking any real money, you may make riskier trades than you would with your real money. Try to treat paper trading as if it were real to get the true experience of how your trading may play out on the markets. 

Additionally, some paper trading simulators may not calculate slippage or commissions that can affect the final returns price of a day trade, so it won’t give you what would have been your true profit in the “real world.”

Final Thoughts

Paper trading is great options for both new and experienced traders. While it has some cons, it’s a great way to practice trading without risking any real money. You can get your practice in and form a strategy with paper trading.