People are often afraid to start trading because it involves real money but there is a way to practice and get the feel of the market without risking a single dime. The term ‘paper trading’ comes from the stock exchange market, where investors who wanted to practice would write their investments on paper and follow the market movements.
The various trading markets attract many new traders, some of whom are long term traders whilst others are looking to make shorter term trades. Common to all new traders is some understandable hesitation and concern at losing money from their trading.
Whilst any type of trading has its risks, brokers offer a variety of tools to help first time traders to improve their trading skills. One of them is called “paper trading”, although you are less likely to hear the term, since in the online trading industry it is commonly called trading on a demo account.
Over the years, stock market simulators have allowed investors to practice stock trading, without putting real money on the line. This has given investors the chance to determine how their trading strategies would have fared in a live market.
With modern technologies, investors can now easily practice their trading skills and back test their strategies in order to establish their viability. This puts any trader at a unique advantage of knowing how their trading strategies would have performed in real time.
The other benefit of stock market simulator is to enable investors to fully adapt to a broker’s platform. This ensures they can easily navigate and understand the numerous innovative types of trading orders available on today’s robust trading platforms as well as all the features and tools.
Demo accounts are widely used by first time traders who want to practice and learn how to trade before they trade with real money. Other users of paper trading/demo accounts are by more experienced traders, who want to test new strategies or practice on new trading channels, learning about the market, and most importantly – learning about themselves as traders. Needless to say, this is a very useful tool in the trading world.
Using a demo account allows first time traders to experience and trade with an account that looks and acts similarly to the real online trading accounts traders use. Demo account users receive an amount of virtual money in the beginning, and can start trading by opening selling and buying positions. Just like a real account, the demo account shows market movements on the traders’ screens, so they can decide if they should continue their trade or get out. At the end of the day they can assess their actions, learn from them and get ready to start trading in their real account.
For demo account users it is not only important to practice on demo accounts, but also look back at their actions and learn from them. This is also important for more experienced traders, who want to practice on the demo account for any reason. They need to check if their trades are as successful as they hoped at the end of the day.
However, there are some risks to paper trading which should not be ignored. Some people would advise not to begin with a demo account for a number of reasons.
The main one, according to them, is the sense of euphoria paper trading can give. Since there is no real money being used, traders can take risks that they otherwise wouldn’t, thus expanding their profits. A case of money loss, on the other hand, is often not taken very seriously since, it’s not real money that’s being lost. There is another disadvantage; since it’s not their money they are trading with, they won’t always follow the market and respond as they would if it was their own money.