Paper Trading: All You Need to Know in 2021
All seasoned investors know that the stock market’s environment is one of extreme unpredictability. If you are a beginner in the field, you will find out soon enough. In the initial stage of every stock market investor’s journey, the market’s unpredictability tends to hit hard. Hence, it’s extremely important for you to learn about the stock market (at least get well versed with the basics) before you start putting some of your hard earned money in the stock market. Paper Trading is one such way. Yes, it can help you become better versed with stocks and stock trading. Let’s find out more about paper trading.
Paper Trading: What Does It Entail?
What is paper trading?
Paper trading is nothing but trading in the virtual stock market environment without actually investing a single cent. This virtual environment exists on its own and all of the trades made here have no bearing on the real stock market.
What is a Paper trading software?
Paper Trading, interchangeably called Virtual Trading, is a simulated software application platform to give you a touch and feel the experience of share market trading. This is done primarily using paper and involves no real money.
How does paper trading work?
Paper trading simulates the real world values and price movements of stocks and gives you the option to trade with the help of virtual money. Paper trading gives traders an option to try different trading strategies out. This helps traders test the success or failure of a particular strategy without risking money.
Can you paper trade when the market is closed?
Yes, you can paper trade TOS during after hours. Their simulator let’s you go back historically and trade going forward.
How did the term “paper trading” originate?
The term ‘paper trading’ or ‘paper trade’ was born during a time when stock market trades were still conducted physically at an exchange without an electronic platform. Traders and investors used to practice on paper by writing down their trading strategies and ideas and they would compare it with the price movements of stocks within every trading session.
However, once technology for trading in a virtual environment became commonplace, traders also gained the ability to paper trade using fully electronic stock market simulators. These simulators are very similar to actual stock trading platforms.
What are some of the advantages of paper trading?
Here are two major advantages of paper trading:
Absence of risk
It’s a pretty obvious benefit. You don’t use any real money with paper trading so your savings are not at stake everytime you paper trade. This leads to a complete elimination of any kind of risk. In such a scenario, you can feel more confident about making bold trading decisions. Because you won’t lose any money even if your trading decisions end up incorrect, you will be able to practice and learn the art of trading in the stock market with much more ease.
Absence of stress
Because of its fast pace and high stakes, stock trading can become a very stressful thing to do . When you’re new to this activity, emotions like greed, fear, and stress might take over, leading you towards trades that don’t go according to your expectations. However, when you get a good amount of practice through paper trading, you will be successfully able to keep your stress and emotions in check. This also makes you more objective towards trading in general/
What are some of the disadvantages of paper trading?
Now that we have discussed the advantages, let’s take a look at some of the disadvantages of this fascinating way of learning how to trade stocks.
It can make you trade more than you know how to manage
Because you only use virtual money for paper trading, you might not feel the gravity of the trade in the manner that you should. This might enable you to take far more risk than you would if actual money was at stake. You might also end up being dismissive towards the losses suffered by you during paper trading. This can have dire consequences in the real world.
It doesn’t account for other costs
Yes, you can practice a simulated form of trading through paper trading but it doesn’t account for any other kind of cost. In reality, the cost of the stock isn’t the only cost that happens during stock trading. During real trades, you would incur a wide variety of expenses such as commissions, fees, and taxes, among others. All of this can add up and pull your profits down in a massive manner. Sometimes, the costs associated with trades can be the difference between a profit or a loss. This is a scenario that paper trading will never prepare you for.
How long should you do paper trade?
Although there are different opinions on how long a beginner should stick with paper trading, the answer is 1 or 2 years. For beginners, paper trading should last for any longer than 4 weeks.
Paper trading: conclusion
As online trading accounts and platforms have ballooned in popularity, paper trading has also become incredibly popular among investors. Most brokerages provide some kind of tools to help you practice trading in a simulated environment. This goes a long way in helping you test your trading strategies before you implement them in the actual share market. However, you must remember that even though paper trading platforms simulate real world markets, the data feeds might not necessarily be real time. So you must be mindful of that whenever you try your hand at paper trading.