Paper trading: benefits and shortcomings
In trading, it is essential not only to have proper knowledge but also to apply it in practice. In turn, to acquire practical skills, it is not necessary for aspiring market players to immediately risk their assets by entering the games of professionals. They can achieve this goal by participating in paper trading.
Paper trading is a conditional name for the simulation of market transactions, in which a person does not make real decisions and steps but writes them down and tracks the further dynamics of the conditional assets as if these actions were done in reality. Depending on the level of scrupulousness of the aspiring trader, paper trading can be carried out in various ways, from making notes in a notebook and creating complex infographics and charts.
The main goal that a person pursues in paper trading is to master proper decision-making and strategic thinking without putting any resources at risk. At the same time, this practice has both advantages and disadvantages. This article will talk about them, as well as the essence and forms in which paper trading can be carried out.
How do you paper trade?
The easiest way to describe paper trading is as follows: you do everything you would do in regular trading; however, instead of conducting particular actions concerning buying or selling assets, you write down your decisions to do so.
It is presumed that when entering paper trading, you already have a basic knowledge of market processes and actions that constitute the essence of trading. Therefore, if you know what to do in real trading transactions, paper trading will not be difficult for you. You choose the stock you like, you catch the moment when the entry price is right for you, and you enter the trade (on paper, not in reality). In the future, you monitor the stock you have chosen and decide to exit when you deem it necessary.
After all these procedures, you look at the results of your operation, analyze them and draw conclusions about how successful it would be if all the actions were done in reality and not on paper. Repeat this several dozen times, and you will have enough data to analyze and begin to formulate an understanding of the patterns based on which the market operates. This knowledge will allow you to form the foundation of a personal trading strategy, which you will be able to develop until you are finally ready to trade in real markets.
As for the specific forms that paper trading can acquire, they are numerous and varied. In fact, there is no exhaustive list because a person can invent as many simulation situations as his or her imagination allows. In most cases, beginners carry out paper trading through ordinary notes, creating spreadsheets, or using trading simulators online. However, if you come up with a new method of paper trading, no one can forbid you to use it to practice your skills.
Now that you know about paper trading let’s discuss the advantages and disadvantages of this practice.
Pros of paper trading
Paper trading allows you to gain practice, even through simulation. You can master the theory of trading perfectly and become aware of all the latest trends; however, without at least basic practical skills, this knowledge is insufficient. Having tried paper trading a few times, you will understand the mechanics of market procedures and the laws based on which they operate.
With paper trading, you don’t risk anything. All your decisions are hypothetical and, therefore, do not involve the investment of any real resources. Thus, the situation is beneficial for you from all sides: you get the experience needed to switch to actual trading for free, without costs or risks.
It is a stress-free procedure. Although this point is related to the previous one, because stress is a direct result of risks, it should still be singled out only because it demonstrates how calm and harmonious paper trading is. Given its conditions, this simulation allows you to maintain a sober mind and sanity at all times. Aren’t these the best conditions to learn something new?
With paper trading, you get valuable analytical data. Repeated over a long period, this procedure gives you essential insights into market functioning patterns and allows you to build your strategy.
Cons of paper trading
Paper trading does not take into account all the factors through which the market influences individual securities. The advantages and disadvantages of specific positions that people involved in paper trading deal with are only some of the many aspects that determine certain openings’ profitability.
When dealing with paper trading, you can’t fully translate its results into reality because it doesn’t consider commissions and slippage’s monetary costs. This factor can be insignificant when dealing with small sums; however, if you want to operate with significant funds in your trading, it must be considered. In turn, with paper trading, you will not be able to prepare yourself for this task.
Emotionally, paper and real trading are entirely different. The real form of this activity is much more stressful and emotionally exhausting. Therefore, by getting involved in paper trading, you can prepare yourself to work with real markets practically, but not emotionally.
Undoubtedly, paper trading is highly beneficial for beginners, allowing them to learn the market’s laws and rules without risk and stress. At the same time, you should not forget that it does not create a perfect imitation of market processes. The simulations’ capacities are limited. However, the presence of disadvantages does not diminish the advantages that paper trading provides to aspiring traders.
If you are interested in detailed information about paper trading and related concepts, you can learn more on Finmax