A paper is like an imitation of the actual trade for a trader to practice buying and selling. Traders do this simulation because they want to know how the real thing feels without losing real money. Today, actual trading is already done electronically. So, it makes sense that simulation trades are also possible through an electronic stock simulator which will more or less make you feel like you are in an actual trade. Paper trading is named as such because it was not that modern before. Hence, people who want to become successful traders practice using paper and not real money. Paper traders keep records of every possible trading position, portfolio, wins, or loss.
The rise of paper money
While it is true that the term paper trading came from how it was in the past, it has become popular with the help of online trading platforms and software. These simulators can make anyone feel like they are in the live forex markets. Everything is the similar, except there is no real money or capital involved. Various brokers offer such simulations to clients.
What to do on paper trades
We know that paper trading is only a simulation and practice. However, investment decisions should still be made as if it was the real thing to earn the benefits of paper trading. Hence, everything is considered on the live market should be taken seriously. If we name examples, they are risk-return objectives, investment constraints, or trading horizons.
Paper trades are also applicable in different market conditions. For example, we can place trades in a volatile market or an ordinary market. If the trade is placed on a highly volatile market, there would most likely be slippage costs because the spreads are wider. Slippage happens because the price was way too different from the trade’s initiation time to the trade’s execution.
If you engage in paper trading, make the most out of that simulation. Hence, familiarize yourself with everything that you need and want to learn when in a live market. You can take this time to learn different order types like stop losses, limit, and market orders. If a broker offers paper trading, it will also most likely have charts, quotes, and fundamental news feed.
Is it wise to use paper trading accounts?
Yes, everything may look the same, but it will never feel the same. If your goal is familiarization, the paper trade is the way to go. But sometimes, when you are aware that you will not lose money in any way, you have this false security that you most probably won’t feel in live markets. Since you know that your capital will not be touched, you may be braver in paper trades but not in the live market. When you are in a simulation trade, the investment strategies may only be the basics when they are far more challenging in the real market. In layman’s terms, paper trading might make live trading look easy when it is not. So, traders’ behavior may be different in a paper trading account against the real thing.