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The Dual Benefits of Paper Trading: Never Lose – Always Learn

16 December 2020 No Comment

How Can Traders Benefit from Paper Trading?

Simulators, we are all familiar with them in some way, shape, or form. Perhaps you played Simulator Games as a teen or adult, such as World of Warships, Silent Hunter: Wolves of the Pacific, ARMA 3, Insurgency: Sandstorm, Euro Truck Simulator 2? Maybe, you attended Theme Park simulation rides such as the Amazing Adventures of Spiderman, Harry Potter and the Forbidden Journey, Transformers the Ride, or Dinosaur? In any event, simulation is as close to the real thing as you’re going to get. In gaming you have nothing tangible to lose, but in trading you really do. Money.

Before you rush off to an online trading platform and deposit hard-earned cash into an account, consider your options. Many world-class trading platforms feature paper trading options a.k.a. demo trading accounts for registered traders. To the untrained eye, paper trading mimics authentic real-world trading in every way. These simulated stock trades allow you to implement tactics and strategies as you would under real market conditions. There is no discernible difference to your trading activity whatsoever.

Absent the Risks of Trading for Real Money

From a psychological perspective, paper trading is worlds apart from real money trading. Traders and investors are naturally more cautious when real money is involved. Given the value proposition money holds, it has opportunity costs associated with it. If you take a limited resource such as money and deposit it in an online brokerage account, that capital is no longer available for alternative uses. That’s the opportunity cost of real money trading. Of course, risk is a prerequisite for reward – the two go hand-in-hand. With paper trading you can practice as much as you want, until you feel confident enough to start trading real money.

Paper trading simulations can be thought of as the bridge between the rewards you seek and the risks you must be prepared to take. In this particular case, paper trading provides a degree of stabilization since you can test various types of trading strategies and settle on the ones that work best for your needs. It would be injudicious to extol the merits of paper trading without cautioning about some of the pitfalls. Everyone who paper trades does so with abandon. It is easy to funnel funds any which way you want with paper trading, since it’s not real money to begin with. If you choose this option, be sure to take it seriously – that’s the only way you’re going to get benefit from paper trading.

Since these trades are not being recorded in an official real-money journal – it is paper trading after all – it’s important for you to record your paper trades in your own journal, for posterity. That way, you can learn from your mistakes, and capitalize from your correct calls. By partaking in paper trading, you can enter limit orders which initiate buy orders on your paper trading platform. You can set exit points near resistance levels and cream it off the top. This type of experience can be put to use for real money at a reputable trading platform.

What’s the Difference Between Paper Trading and Live Trading?

The primary difference between paper trading and live trading is the absence of risk in paper trading. Too many traders learn the hard way by losing their entire bankroll in pursuit of the perfect trading strategy. Trading platforms understand that there is merit in teaching traders to fine tune their skills in a demo trading platform, rather than allowing them to burn through their cash and never see them again. It’s a win-win situation. Trading platforms get to showcase their strengths, features, and functionality and traders will reward them with their continued patronage. All the while, traders aren’t losing any money while learning the ropes.

This begs the question: Can you learn anything from making mistakes on real money trading platforms?  The answer is a definitive yes. You quickly learn through loss of capital. Either, you will adopt a more conservative approach to your trading if you have been too liberal, or you go the other way. Real money trading teaches you that time is of the essence, and when a trade is going your way, you probably want to have more, rather than less, riding on that individual trade. In real money trading, emotion is the great destroyer of profitability. You quickly learn to remove emotion from the equation and allow clean-cut logic to prevail.

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