Paper Trading – Practice makes profits

The Stock Market is a lucrative entity and a get-rich scheme for anybody who has not tasted the good and evil of it. “All that glitters is not gold”, the stock market is no different. What might seem a great way of making money from the outside, might have a totally different reality once you step in.

Bull markets are a great way to trap such new investors who only see one-sided movements in stocks and everybody seems to be in profits and the markets on high euphoria. This is where re-distribution is done, where smart players offload their holdings onto new investors which they call “dumb money”. This is why paper trade or paper trading is important.

As a newcomer in the world of stocks and investments, people only realize that it is a buy-and-sell game. Most of us newcomers ride our luck, some gain, some lose and some get trapped for a considerable amount of time testing their patience. As no trade is taken in any calculative manner, asserting the risk to rewards or any fundamental analysis, every trade is on opium and more of a casino.

For a new investor paper trading is very important. Here are a few key points where paper trading is useful:

• It will make the new investor learn how investments should be done.
• It will help them to learn key technical and fundamental aspects on which basis stock selection and entry can be achieved.
• Most important of all, it will help to learn patience and the constant drive and hunger to keep learning.
• To control greed and fear. Controlling greed and fear might not be the direct recipient of paper trading. But with constant learning and once a newcomer discovers the importance of keeping his nerves, paper trading may prove a handful in learning this art.

What is Paper Trading?

Paper trading is a way to practice buying and selling stocks without using real money. It’s like a simulator where you get the taste of real trades without the fear of losing anything. This helps you learn how the stock market works without risking any real cash.

Advantages and disadvantages of Paper trading

Paper trading only provides a buy-sell platform, but the rationale behind selecting trades is solely on the newcomers’ ability and adaptability to learn. Paper trading simulators will be most useful when the newcomer is ready to learn and not get excited about the winning or losing trades on paper he makes. It’s all about learning the rationale behind taking a trade. A paper trade with no logic or a technical reason is not worth taking. 

As paper trading is done with fake money, the fear and greed factor finds no place while making a trade. This makes it hard for a newcomer to understand the real psychology behind taking trades. With no fear or greed factor, paper trading cannot be stimulated for real trading as ultimately trading is about controlling your nerves and keeping faith in your trade.

Paper trading can be the path or the gateway that will take you to the real world with some confidence and understanding of the markets, But the real test will come once you are live on the platform with real money. The real test is to build a psychology and control your fear and greed which paper trading lacks.

Having emphasized so much on the negative aspects of paper trading, the only positive about it is, that it gives you a firsthand experience of how a trade is made. It also helps to get yourself accustomed to the real trading world-building strategies based on different technical indicators which can be worked upon using paper trading.

Let’s say on your journey of paper trading, you have learned about the RSI and the MACD. With paper trading, you can use these technical indicators to place your trades, and once you have gained confidence and found the probability of the trade going in your direction as per your discretion, you can move into real trading using these two indicators.

For someone who has worked on EMA (exponential moving averages) or even let’s say Ichimoku Cloud, or one who is trying to understand risk management, it is very necessary that one gains confidence with the outcomes of trades based on these indicators or management rules.

Having dealt with any indicator N a number of times on paper will boost the confidence of the trader in live markets. If you stick to one plan and one strategy for quite a time, you will gain enough experience and confidence about where it will likely fail, or what probability it will hold to succeed. For traders with some experience, paper trading helps them to identify how their newly worked upon strategies work in the markets, and based on the winning and losing percentage of those strategies, a seasoned trader can bring it to live markets.

Therefore, if one is open to learning and working on building strategies, Paper trading will be very advantageous and may provide a smooth passage to the real trading world.

Some paper trade firms offer virtual trading platforms alongside real platforms, while others offer distinct paper trading platforms and stock simulator games. Here are some of the paper trading platforms:

• TradingView is a popular charting and technical analysis website. It also provides paper trading features. It is one of the best paper trading websites in terms of the facilities it provides like charts, technical tools are more.
• Neostox
• MoneyBhai
• ChartMantra
• Sensible-For those delving into the world of futures and options
• Dalal Street Investment Journal (DSIJ) – Collaborative Trading Platform
• TrakInvest – the ‘Copy Trade’ feature
• Trading Leagues – for volatile markets like crypto
• Zerodha

Paper Trading vs. Live Trading

The most obvious difference is that paper trading doesn’t come with the risks associated with markets. With No risks, the ability to learn and build psychology behind any trade is hard to master in paper trading. Live market trading may lead to nervous moments and put you to real tests.

Risk management is another key aspect of a trader’s journal. Risk management can be learned while paper trading, but as with paper trading no emotions are attached, the real theories will be put to the test once you dive into real markets.

There are times when in a real trade, people react with sudden news events, throwing off their trade entry bias, and getting out of trade out fear. Whereas in a paper trade, people would certainly ignore such news events and will stick on with their trade bias, as no real money is involved keeping out any fear.

How Effective Is Paper Trading?

The effectiveness of Paper trading relies more on an individual who is adamant to test and learn new trading strategies, and techniques before they actually put them into practice with live trading. The hungrier one is for knowledge, the more rewards he gets and the more confident he becomes. For seasoned players, paper trading is a boon, as it gives them a platform to apply their newly worked-up strategies and figure out the cons and pros of it.

Conclusion

Trading is risky. The magnitude of potential losses and gains can be huge. We only see gains and enter this market without any prior knowledge and get stuck into assets without knowing anything about their current trends or money flowing in and out of the markets.

One way to help keep us informed about the dynamics of trading is to try paper trading. This form of stock simulation allows you to test out and practice how to buy and sell stocks without putting up any real capital. Learn the tricks of the stock market, get accustomed to the market dynamics, learn risk management by being realistic in paper trading, and then enter the real market.

FAQ – Paper Trading