What is paper trading?
The advancement of technology has increased the ease and popularity of paper trading through online trading platforms. Today, there are numerous simulators that enable traders to trade without the actual capital. This is a great feature for new traders to try and test trading strategies risk-free. Read on to know what is paper trading, its benefits, the best trading platform and trading tips.
What is paper trading?
The term paper trading dates backs to the stock exchange market where aspiring traders would practice trading strategies on paper before risking their money on the live market. Most beginner traders have some sort of concern and hesitation to invest in the volatile environment. While all trading options have risks, brokers provide several tools to help beginners improve on their trading skills. For instance, most online trading platforms feature an electronic market stimulator, commonly known as the demo account. It is better than initial paper trading because it looks and feels like the actual trading platform with even virtual money. This is a great feature that enables new traders to test their strategies before executing with real money on the live market.
How does paper trading works?
Modern trading platforms have a feature that allows users to try different options and investment strategies without losing their money. In most cases, the simulator looks exactly the same as the feature-rich live trading platform. The only exception is that there is no real money gained or lost.
To get the most benefits from a simulator, you should not use just for the sake. It is advisable to use real trading practices. For instance, you should consider the risk-return objectives, trading horizons and investment constraints as you would on a live account.
Moreover, paper trading can be used in various market conditions. For example, a market with high levels of volatility has wider spreads that can result in higher spillage cost. This is when there is a change in price from the time the trade is initiated to the time it is executed. You can use the simulated trading platform to familiarize yourself with some of the features on a live trading account such as stop-loss, limit order, market orders, etc.
Benefits of paper trading
- No risks involved
There is no real money involved in paper trading. This means that you can’t lose money due to poor decisions or bad timing. Also, it enables you to observe and identify all of the mistakes in your analytical process so that you can start creating well-defined strategies.
- Stress-free
Since there is real money involved, trading on the live account evokes both greed and fear emotions. This blinds most investors to get valuable information needed in risk management. However, there are no emotions involved in paper trading, which enables new traders to focus on the mathematical process and not the flaws.
- Practice
Paper trading will help you to gain experience in everything involved in the trading process from the initial preparation steps to the final gain or loss part. Most simulators have virtual money that will enable you to learn how to use money when trading.
- Confidence
It takes a long time for a novice trader to start making viable strategies. A trading simulator will enable you to perfect on your trading strategies and gain the confidence to begin trading on the live market with real money.
Key limitations of paper trading
- Emotional reality
Paper trading offers a false sense of security to the investor that inspires new traders to try their strategies on the live market, which results in distorted returns. The nonconformity happens because there is no risk of genuine capital in paper trading. Also, paper trading only allows for simple strategies, like buying low and selling high. This is relatively easy on paper trading but very difficult to achieve on the live trading.
- Formfitting
Most new traders using paper trading simulators pick out the easiest entries and exits. As a result, they miss out on a myriad of obstacles and challenges involved in the current computer-driven market.
Best paper trading platforms
- eToro
eToro is a well-known trading platform established in 2007. It is considered safe because it is licensed by reputable regulatory agencies around the world. The platform has grown, and it is probably the biggest online trading platform with more than 10million clients.
One of the most essential tools for most traders is a paper trading account, commonly referred to as the demo account. The eToro demo account is ideal for both novice and intermediate traders who are looking for a safe way to brush their skills without losing money. It is free and unlimited, which means you can use it for as long as you want. Also, it offers tools for self-teaching on a clean and intuitive interface.
The process of registering on the paper trading account is straightforward. This is because the account will be activated immediately you submit your information on the registration page. Alternatively, you can sign up through your Facebook or Google accounts. Apart from being free and with no time limitation, it also comes with $100,000 virtual currency. Even though other online platforms offer paper trading accounts, the support, tools and simplified access on eToro cannot be matched.
To switch from your simulator to the live account, click on the small button below your profile picture. It is designed to make it easy to switch between the two accounts. eToro live account has an outstanding copy trading feature that will enable you to replicate other traders’ strategies. The demo account allows you to try and test your own strategies without the fear of losing money.
After learning and gaining confidence, you can start trading on the live account. The minimum deposit is only $200. However, for US and Australia residence, the minimum first deposit is $50. Also, all the subsequent deposits should be at least $50, no matter where you reside.
Pros
- Free and unlimited paper trading account
- Simple registration process
- Easy to switch between the demo and live accounts
Cons
- High minimum deposit
- com
Forex.com is a well-established online broker company that offers a wide range of assets including foreign currencies, stocks and commodities in major global markets. It was established in 2001 and is operated by GAIN Capital Holdings, which is listed on the NYSE.
The demo account looks exactly the same as the live account. It will not only enable you to try new strategies but also learn how to navigate the platform. Whereas most online brokers are offering unlimited demo accounts, Forex.com offers it for only 30 days. Nonetheless, it comes with a $10,000 risk-free virtual currency. Apart from the demo account, there is also the standard, commission and DMA accounts.
To get started with a demo account, you are required to fill the registration form, which is very easy. You only need to submit your name, email, and phone and indicate your country of residence. By clicking on the submit button, you consent the broker to provide information on its products and services. You can withdraw your consent at any time.
Before you start trading on the live account, you will need to provide proof of identity and address. For the proof of identity, you can submit your passport or government-issued ID. On the other hand, provide a bank statement or utility bill for proof of address. This is to conform to anti-money-laundering (AML) regulations.
The initial deposit is only $50, which is too low compared to other premium services like eToro. Also, there is no deposit fee, and you can use various methods such as bank transfer, credit/debit card and electronic wallets.
Some online brokers offer only one type of base currency. If you deposit is a different currency than the base currency, you might be charged a conversion fee. Forex.com supports seven major base currencies that include USD, GBP, EUR, etc. Note that if you use minor currencies that are not supported, you will be charged a conversion fee.
Pros
- Wide range of payment options
- No deposit fee
- Sufficient virtual currency
Cons
- The demo account is only available for 30 days.
- Cryptorocket
Cryprorocket is a relatively new online trading platform with the latest technologies to address current issues. Although it puts a lot of emphasis on the cryptocurrency offering, it also offers a wide range of assets. The MetaTrader 4 (MT4) platform is easy to use yet powerful for desktop and mobile devices.
Practising is an indispensable part of the trading journey. To get familiar with what the site is offering, you are recommended to download and try the MT4 demo account. You don’t need to register or even deposit any funds to get started on the demo account. In addition, it is possible to have more than one practice account as long as you are active. The demo account offers real-life trading conditions and pricing, just like on the live account. If you encounter any issue, you can contact the customer support on the live chat.
This trading platform is available from all over the world, excluding countries with strict restrictions like the US. In addition, some of the features and products may not be available in specific countries because of legal restrictions.
Cryprorocket offers a safe and reliable web-based and app trading platform. The web-based platform can be accessed easily on any browser without the need to download or install additional software. On the other hand, the mobile app is available on both Android and iOS devices. It is a great feature to enable you to access your account and trade on the go.
Although Cryptorocket is not regulated by any government agency, it is headquartered in Saint Vincent and Grenadines, which is a privacy-friendly country. However, the broker works very hard to ensure the system is secure. In fact, the network is monitored continuously for suspicious activities.
One of the most noticeable features is the Straight-through-Processing (STP) execution model. This means that you will not need to worry about re-quotes and desk intervention when placing a trade. Also, this execution model removes the conflict of interest that can exist between brokers and traders.
Pros
- 24/7 customer support
- No deposit and withdrawal fee
- STP execution model
Cons
- Not regulated by government agencies
- TD Ameritrade
TD Ameritrade is one of the most trustworthy online trading platforms. This high-quality platform is ideal for both active traders and beginner investors. It provides a large selection of assets including stock, options, ETF trades and mutual funds.
This platform requires $0 minimum investment and offers standout features such as extensive and free research data, zero commission for the stock, portfolio-building guidance, etc. Also, it has over 300 physical branches for in-person customer support.
If you are new to trading, getting started can be intimidating. Most reputable brokers offer resources for beginners and advanced traders to brush their skills. TD Ameritrade is one of the few online trading platforms that provide mock trading accounts. Also known as paperMoney, its simulator offers $100,000 virtual money as well as access to a margin account. In addition, it offers other helpful resources such as Jawwalk Consensus, S&P columns and research, market edge, etc.
Unlike its competitors, TD Ameritrade offers two primary trading platforms, each with a mobile app. TDAmeritrade.com is the first platform, and it provides everything you need to identify, research, screen and trade various assets such as stocks, funds, bonds, CDs and options. Separately, the company has another trading platform called thinkorswim, that is aimed at serious ETF, stock, futures, etc.
There are no withdrawal charges if you use ACH transfer. However, this method is only available in the US. Users outside the US can use wire transfer, which cost $25. There is no fee charged if your account remains inactive like on other trading platforms.
Pros
- Easy to use interface
- Extensive education tools
- Virtual simulator
Cons
- Limited withdrawal methods
- eOption
eOption is a low-cost online trading platform that will help you to enjoy significant cost savings on options trades. This significant discount may not be appealing to beginners or long-term investors. However, it offers perfect for active options traders with speedy executions and low commissions.
There is an attractive paper trading tool that is accessible even to non-clients. It comes with $100,000 virtual currency to help you test strategies research and evaluate ideas, create a watch list and monitor simulated portfolio performance. This is an excellent feature for investors new to options trading.
Nowadays, most online brokers are no longer charging a base commission for options trades. Investors are only required to pay the per-contract fee, which frequently cost around $0.65. However, eOptions charges $1.99 plus 10 cents per-contract fee.
There is a feature on eOptions known as automatic trading that execute trades based on newsletter suggestions. You will be required to subscribe to one of the 60 participating newsletter and eOptions will automatically execute the trades recommended. The good part is that you will have to choose the maximum amount per trade or even unsubscribe from the feature.
Pros
- Great value for option traders
- Easy to use web-based platform
- Newsletter automatic trading feature
Cons
- Limited education tools
Features to look for when choosing a paper trading platform
- Order flexibility
Perhaps the first thing you should consider when selecting a paper trading platform is order flexibility. The simulator account should enable you to place limit, stop loss and execute other conditional orders just like you would on the live trading account. Actually, some site will even allow you to automate order based on defined triggers and technical patterns.
- Customizable analytical tools
Don’t be afraid to try new chart patterns or technical indicators into your trading practice. The point of using paper trading is to learn how to trade like a professional. Technical analysis on the paper is one thing but seeing it in action is a different thing altogether. So, choose a paper trading platform that is loaded with analytical tools.
- Intuitive interface
A paper trading platform that is difficult to navigate will offer more frustrations than education. Choose a platform with an easy to use interface and avoid anything that will require you go through a lot of steps to execute a single trade.
- Pricing
Right now, there are tons of paper trading platforms. Some offer free services while others require you to pay for real-time data or even the simulator itself. The cost will mainly depend on the information you want and the broker you are dealing with. However, note that most free services will not require you to create or fund an account.
- Portfolio tracking
Apart from giving access to the same portfolio tracking as the live trading accounts, some platforms will enable you to break the trade further. This will allow you to see where you thrived and where you may have gone wrong. Choose a platform with such features, especially if you want to try new trading strategies.
Paper trading tips
- Be realist as possible
It is imperative to be as realistic as possible when using a paper trading account. Otherwise, it won’t be of much good. When practising on the simulator, you can use as many virtual tokens as you want. However, it is advisable to use an amount close to what you will typically trade on a live account.
Just because you can use up to $10000 virtual money when using a simulator does not mean you should. If anything, it will create a notion that it is ‘play money’. This will prevent you from making meaningful progress with the practice. Furthermore, be realistic on how you approach trades. Work with the types of trades you would use on live trading and try as many strategies as you want.
- Record and track your results
Create a trading journal to track the strategies that work to refine your trading methods. Concentrate and improve on the strategies that work and serves you best. This a good way to develop a good habit when you start trading live.
Remember that paper trading is only valuable when you treat as much as live trading as possible. Therefore, keep a note of the entry and exit points, the shares you purchased, risk/reward ratio and almost everything you do.
- Concentrate on developing your confidence
Paper trading should help you gain the confidence to trade on the live account. Since investing in the live markets is a bit scary, most people use paper trading as an excuse. Even though there is no perfect to avoid making losses, using paper trading help you understand different setups better.
Conclusion
Paper trading is an excellent way to try and test strategies. However, even the best trading simulator cannot be a substitute for live trading. It is good to know that paper trading does not guarantee success in real trading.
Frequently asked questions (FAQ)
- What are the key features of a great paper trading platforms?
The best paper trading platform should be as close to the real live account as possible. So, choose a platform that offers plenty of functional features, intuitive interface, accurate market quotes and realistic user experience.
- What is the difference between paper trading and real trading?
The only difference between a paper trading and real trading account should be the money used. Paper trading accounts use virtual money while live account involves real money. All the features found on the live account should also be included in the paper trading account.
- Who should use paper trading?
Paper trading is particularly ideal for traders who are new to trading. Nonetheless, also experienced traders can use paper trading to try and test new strategies before implementing them on the live accounts.
- What is the best way to use a paper trading platform?
To make the best out a paper trading platform, you should create a plan. Record as much information as you can, such as the opening price, closing price, etc. Also, take paper trading serious and not just as a practising account.
- Why is a paper trading platform?
You can be a genius trader in theory but very poor in real trading. Paper trading helps you to prepare to become a professional trader. –