What is paper trading?
Financial markets attract scores of new traders every day. Many of these traders are looking to make short-term trades, while others prefer to be long-term traders. There is a degree of apprehension among new traders, given that they can lose real money from their trading activity.
It should be noted that all forms of trading activity are inherently risky. To mitigate these concerns, brokers provide a variety of tools and resources to accommodate first-time traders. These are designed to help you improve your trading skills, to enhance the success of your trading activity. One of these tools is known as paper trading.
It is unlikely that you will hear the term being bandied about too often, since the more familiar term is demo trading, or a demo account. The concept of paper trading emanates from the stock markets where investors would practice their trades by writing them down on a piece of paper and then follow the market movements to determine if they were successful.
Benefits of Paper Trading
Zero risk Trading
For starters, a demo account means that you’re not trading with any real money. Newbie traders can practice trading in the financial markets – under real-world conditions – with a demo account. No real money changes hands, and it is 100% safe to trade on a demo platform.
Experienced traders also test different trading strategies with demo accounts – a.k.a. paper trading. This is a great way to learn about the financial markets, and your own strengths and weaknesses. Paper trading is the most useful resource for FX traders, speculators, day traders, and others.
A Virtual Trading Account
Paper trading or demo trading makes it easy for newbie traders to dabble in the financial markets with an account that functions exactly like a real trading account. However, demo account traders do not trade with real money, they trade with virtual money. You can start by buying/selling financial instruments – much as you would with a real account.
The demo trading account reflects all market movements on your screen, and you can decide whether you should buy or sell accordingly. Once the markets have closed for the day, you can learn from your trading activity, and then put your tactics and strategies into practice with a real account.
One should always reflect on demo trading activity to learn from trades that worked and those that didn’t. Experienced traders routinely evaluate their trading behaviour, and learn from it in subsequent trading sessions. Demo accounts are the perfect resource for practicing tips, tricks and strategies, or simply checking your trades before you put down real money.
What are the Disadvantages of paper trading
While there are many notable benefits of using a demo trading account, there are also certain disadvantages. These include the following:
Trading on Tilt
Emotionally-based trading is strongly cautioned against. Paper trading often generates a feeling of euphoria in traders. And since no real money is changing hands, many traders tend to take unnecessary risks. They do this to increase their profits, without conducting due diligence of their trading activity.
Since traders do not regard demo trading as anything serious – they are not concerned about losing money. Yet another disadvantage of paper trading is the lack of responsiveness to changing market preferences. Since you are dealing with your own money, you’re less inclined to closely follow market movements.
Incorrect Market Data
Believe it or not, demo trading platforms will vary widely from one brokerage to the next. Many brokers offer demo trading accounts that have delayed data. This data can be 15 minutes – 20 minutes old. Sometimes, demo trading platforms will use fake data to try and entice traders into the real-money trading arena. Fortunately, you’re in safe hands here at the AvaTrade UK website.
All of the market-related activity, updates, and financial instruments are accurate and displayed in real time. You will have access to the latest streaming market information as if you are trading for real money.
Is paper trading Recommended?
Should first time traders use demo accounts to trade financial instruments? Is it wise to open a paper trading account before you switch to real money trading?
Absolutely yes! Provided you remember how to work with a demo trading account. There are several guidelines that will enhance the effectiveness of your demo trading activity.
#1 Always treat a paper trading account – a demo account – as a real account.
This strategy will always serve you well. For starters, it eliminates the concept of a demo account as a fake account, and it makes the transition from a demo trading platform to a real-money trading platform much smoother.
While it may appear easy to conduct paper trades, something is missing.
When you trade for real money, there is a lot of emotion involved. Since you’re more invested in your trading activity, your emotions can go awry. If you allow your emotions to get the better of you, and you don’t use research and analysis, you will start losing money.
With demo accounts, there is very little emotional attachment. That’s why it’s important to understand that a demo account should be treated as a real-money account. Take every trade seriously, as if you really are trading with your own money.
Ongoing Learning Is Key
Demo trading accounts should be used to fine-tune your trading skills. While you are paper trading, use educational resources like articles, blogs, webinars, seminars, expert advice, and commentary to assist you.
Once you have a grasp of the mechanics of the trading platform, and the financial markets, you will be better equipped to trade for real money. AvaTrade advises clients to practice on the demo account for several days, while researching intensely and then trading for real.
There is yet another reality to contend with. Not everybody is suited to trading. So many of us are eager to start trading, without any knowledge of the trading platform, or the potential financial losses that can accrue. For this reason, it is advisable to practice on a demo account before you register and trade for real money.
The demo platform is a fantastic way for you to understand whether trading is suited to you. If you enjoy paper trading, and you understand market movements, you may want to switch to a real money account.