2020 has been a great year for traders as the stock market has been doing well. A lot of you might be interested in getting into the trading market but is there a way where you can learn trading for free? Yes, there is a way and paper trading will do just that for you.
What is Paper Trading?
Paper trading basically allows you to simulate and experience the process of trading as if it is the real situation. The only difference is that you are not using any money to trade so this allows you to observe and learn how trading works, giving you a better understanding of how the trading market works.
A paper trader would usually record down the trades by hand to study their hypothetical trading positions, portfolios, and profit/losses.
What does Paper Trading provide?
Personally, I am using thinkorswim by TD Ameritrade, a platform where I can do paper trading on options to learn how to trade. The paper trading account allows me to try out different investment strategies and not spending any capital. The account is just like the live trading version and it really allows me to simulate the real trading process.
For you to make use of paper trading, you have to make sure that you are following real trading practices and goals. You should be trading in a volume where it is applicable to your live trading, this means that you should ensure that you are making moves that will be viable when you trade on live. You should be following your principles as if you are trading with real money. For example, if you are not going to be a day trader, it doesn’t make sense for you to do day trading on the paper trading account as it is not what you trying to learn.
Paper Trading vs Live trading
Paper trading may cause you to trade unrealistically since you are being protected as no capital is involved and you don’t have to worry about losing money. Investment strategies may not be followed well since the discipline level will be lower as there is “no risk” in losing money, but certain concepts may be able to put into use such as “buying low and selling high”, this may be more challenging to achieve in live trading but it can be easy with paper trading.
Since money is not a problem or threat in paper trading, paper traders might not be able to fully master the emotions when trading. This is due to the fact that emotions are one of the most important things to learn as you trade. Emotions lead to poor decisions and paper trading will always give you a sense of protection where you are not trading real money. But with live trading, things are different and you will lose money, what if you cannot control your emotions and your try to recover the loss to end up making bad decisions? You will lose all your money!
Benefits of Paper Trading
- No Stress
Since no money is being put at risk, the paper trader can concentrate on just the numbers and how he can improve his investing strategies. By not having any stress, it allows the paper trader to make better decisions and also realize the market better.
- No Risk
Again, as there is no capital at risk, you can just fully focus on learning and no need to afraid that you will lose a lot of money. By doing so, you also will be able to better analyze your trading tactics to find out the flaws that you have and adjust accordingly.
- Actually Practice
As you all know, the best way to learn is actually to do something. By paper trading, you will be able to get experience everything about trading given that you are willing to take the money as real money and imagine it as live trading.
- Boost Your Confidence
After learning from paper trading and making some profits, you will surely become more motivated and confident to do live trading. Everything is about your mind, if you are confident that your strategy will work, you will be likely to make
Is Paper Trading enough?
- Emotion Reality
Traders are more directly affected by profit and loss, so with paper trading, you are not able to learn about the process of controlling your emotions. Bad decisions are made when you let emotions get into your head, paper trading does not teach you this as no real money is involved and the trader will not be as affected when losses are made in their paper trading account.
- Spillage and Commissions
There are other costs incurred when a trader is trading in a live trading account. This means that paper trading will not be able to let you learn how about the total costs for trading since you are buying on paper. There are times where stock costs $50 but the real price of buying might be $50.50 or more with all the other costs included.
How can you make use of Paper Trading?
Well, you can make full use of the platform provided and try out your investment strategies to see if it works for you. Do not take the advantage of not losing any money for granted and take every loss seriously to try and improve your trading strategies.
