What is Paper Trading and How it Works?
Around 95% of traders lose money in the beginning of their trading career due to lack of knowledge and lack of experience in trading. Taking the wrong positions at the wrong time is one of the biggest reasons for the losses. To avoid this we do paper trade.
What is paper trading?
Taking a real time trade in the live market without involving real money with the help of software or literally paper and pen. Paper trade helps Investors and Day traders to practice buying and selling of Stocks, Derivatives and commodities without risking real money. This is not a new method, this method traces back to when aspiring traders used to write and record trades on paper to test their skills without risking their hard earned money.
While learning paper trade keeps track of hypothetical positions, stock portfolio and P&L (Profit and Loss). It is even more helpful for Day traders who specifically trade in Future and Options because it involves a lot of risk and high frequency trades. For F&O Aspirants paper trading helps a lot to learn and apply their quick entry and exit, Testing their analysis and adjusting in high pressure conditions.
Benefits of paper trading
1. Learning without financial loss
- Learning the stock market for beginners can be a complex and intimidating environment. Paper trading offers a risk free environment to the beginners where they can test their potential and strategies in live markets and dynamics like Market fluctuations and uncertainty of the market.
- Without risking real money traders and investors can build their confidence by trying different strategies and it will help them to keep calm while the portfolio is expanding or shrinking.
2. Testing experimented strategies
- Modern trading platforms offer a wide range of Trading tools from charting to advanced indicating tools which can be very confusing in the beginning. Paper trading can help a lot to overcome that confusion.
- We can also do backtesting in the market to test the success rate of a strategy or setup on a few digital paper trading platforms.
3. Psychology discipline
- Emotions like fear, greed and revenge against the market leads to the impulsive actions in execution of trades which causes unavoidable losses. Paper trading helps a lot to develop an emotional discipline by showing different aspects of the market without facing any financial losses.
- Regularly engaging in paper trading helps to develop a daily routine in the traders or Investors life which helps them to build a decent career in future.
Advantages and Disadvantages of Paper trading
Advantages:
- The main advantage and benefit of paper trade is that it avoids financial loss in the beginning stage for aspirant traders.
- Paper trading allows you to test different strategies and techniques that cannot be used immediately in real trading.
- It familiarizes you with trading platforms, with their advanced tools and Indicators.
- It allows you to reach your goal virtually before trading in real life
Disadvantages:
- Paper trading isn’t perfect as it doesn’t involve real securities so it might show distorted P&L (Profit and loss).
- A lot of traders do not maintain emotional discipline as no money is involved which makes issues in real trading.
- Paper trade allows for basic investment strategies such as buying at low and selling at high which is easily achievable in paper trading but very hard to achieve in real trading as money is involved.
How to paper trade effectively?
1. Set clear goals:
Before you start your paper trade journey ask yourself what you want to achieve? You are here to test a strategy? Or are you here to learn risk management? Setting your goals clear will get you clarity and dedication.
Keep a trading journal and record all trades there and write down the reason behind trade and outcome of the trade. And be honest with outcomes either profit or loss.
2. Manage your risk:
- Use stop loss orders to avoid potential losses which could affect your trade psychology. It will help you to avoid capital drawdown.
- Choose a proper position size according to your loss tolerance, it will let you stay in the market for a long term.
3. Analyze yourself:
- Before every trade and after its outcome you must analyze the reasons behind it.
- The strategy behind every trade should be mentioned and changed according to the flow of the market. Entry can be done with a strategy but exit should be done immediately if reversal pattern is observed by another strategy.
4. Transition to Real market:
- Paper trade is not permanent. You must take a transition to the real market but it should be slow and small. Start with very little capital and observe the real trading.
- Apply what you have learned slowly and see the results and have patience while trading.
Common mistakes to avoid in Paper Trading :
- Treating paper trading as game and not taking it seriously
- Avoiding overconfidence
- Neglecting Emotional Factors
- Transition too fast to real trading
- Investing heavy capital in the beginning
- Stopping to learn
Top 5 Free paper trading apps & websites
Paper trading has been done on paper since years but with technological advancement in trading platforms sophisticated and advanced paper trading platforms have arrived. Few are:
FrontPage: Front page is one of the best Virtual trading platforms in India. If you are looking for a paper trading app specifically for Options trading then FrontPage is all you are looking for.
StockGro: If your aim is to be a long term investor then StockGro is the perfect place for you. It provides some virtual funds where you can create your own model portfolio. They also have a community where daily discussions happen and everyone shares their own model portfolio.
Neo Stocks: It Provides real time data from the Exchange. It helps the beginners a lot.
Moneybhai: It is made by money control and provides a good amount of features, tools and indicators.
NSE Paathshala: National Stock Exchange has launched its own paper trading platform known as NSE Paathshala where you can get trained for all Stocks, Derivatives and Commodities.
Paper trading is an invaluable tool for investors in any respect levels, supplying a chance-unfastened environment to practice and refine your techniques. Whether you’re just starting out or searching to test new ideas, paper trade lets in you to benefit revel in with out the fear of financial loss.
It helps construct self belief, sharpen your capabilities, and put together you for the realities of stay trading. By taking paper trade significantly and treating it as a getting to know possibility, you’ll be higher geared up to navigate the complexities of the inventory market whilst you’re prepared to exchange with real money. So, start your paper trading adventure today and set the inspiration for a success buying and selling in the destiny.
FAQ
How does paper trading work?
In paper trading, you are given a virtual account with a certain amount of virtual money. You can use this money to make trades and track your skills and strategies without risking real money.
What are the benefits of paper trading?
Paper trade is very useful for beginners where you can apply the theoretical knowledge you learned. You can also use paper trading to apply your strategy and setup in the real market.
What are disadvantages of paper trading
Influence in emotional impact: Since there is no real money involved in paper trading, it does not impact you and it might lead to difference in real trading.
Difference in execution: Paper trades may not reflect the exact execution times and slippage that occur in real trading.
Is Paper trading Free?
Yes. Paper trading is free and provided by many digital brokers to habituate their environment. Few platforms charge you an amount to improve the emotional impact of losing.
Is Paper trading legal?
Yes. it is 100% legal in India, Infact authorities suggest new traders to start their journey with paper trading before entering the real market.
Can we make money through paper trading?
No. As we discussed previously, paper trade is done with unreal or virtual money. Which is basically for you to learn the market operation. You cannot make money through paper trading. But you can learn the basics of the market through a technical analysis course to trade in the real market and make good returns.
