Paper Trading

Paper Trading
Paper trading

 

What is paper trading?

Paper trading is more commonly used in an institutional setting. It is what we in the Forex or CFD industry call Demo Trading. The term ‘paper trading’ comes from the stock market, where investors who wanted to practise would write their investment ideas on paper and follow the market movements, to see if their ideas panned out.
There are many types of traders, including more short-term and those who keep positions open for the longer term. Common to all new traders is hesitation when it comes to placing trades and of course, concern at losing money from their trading.
Whilst all types of trading come with risks, brokers offer a variety of tools to help first time traders to improve their trading skills before committing real funds. One of these tools is called “paper trading”, although as mentioned you are less likely to hear the term, since we use the term Demo trading.

Click here to open a demo account and master your trading skills! Ready for the real action?

Advantages and Disadvantages of Paper Trading

  • Trading without the risk
    Demo accounts come with many benefits and are widely used by first time traders who want to practice and learn how to trade before they trade with real money. More experienced traders use demo accounts to test out their strategies or to test-drive a new platform they haven’t used before. For new traders it is an excellent way to learn about the market, and most importantly to learn about yourself as a trader. Needless to say, this is a very useful tool in the trading world.
    On the downside though, for a new trader, trading in a simulated environment without committing real funds, feels very different from a real account scenario where real money is at stake. With demo trading, the psychological aspects of trading don’t come into play, like fear and greed.

  • How it Works
    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. This all contributes to assessing their actions, learning from them and getting ready to start trading in their real account.
    For demo account users it is not only important to practise on demo accounts, but also to look back at their actions and learn from them. This is also important for more experienced traders, who want to practise on the demo account. They need to check if their trades and strategies proved to be as successful as they had hoped, and of course, they will use this knowledge to optimise their performance on the back of it.

Disadvantages of paper trading

However, there are some risks to paper trading which should not be ignored. Some people would suggest not to begin with a demo account for a number of reasons.

  • Euphoria Trading
    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.

  • Delayed Data
    Some demo accounts do not use up-to-date information, but delay it by 15-20 minutes, so competitors do not use the data. Others display fake data, but the main goal remains the same – to get traders ready for the Forex market. On the AvaTrade demo account, the information displayed is in real-time and projects the accurate rates. The tool is very common and used worldwide by brokers on stocks, bonds, commodities etc. Due to the fact that there is not real money that’s been put in, it’s often called “Paper money”, “Monopoly money” etc.

Should you use paper trading?

Should you as a first-time trader use paper trading? Should you open a demo account before trading in the real market?

The answer is yes, as long as you remember how to use it to its best effect. A few simple guidelines can dramatically increase the effectiveness of a demo account.

Here are a few simple guidelines that would dramatically increase the effectiveness of a demo account.

  • Treat it as a proper real account
    This will not only overcome the main obstacle of demo accounts, but will ease the transition from demo account to real accounts. Paper trading might seem easy, but there is an important component missing.
    As mentioned briefly earlier, real trading involves a lot of emotions, which can be a plus since traders are more invested emotionally. But this can lead to negative consequences – emotional trading, with no real thought or research and ending with money loss. Again, with demo trading you may feel the adrenaline rush and the fear or the greed. So as long as you factor this in, the transition from demo to real will be more successful for you.

  • Learn as much as possible
    It is highly recommended to practise on a demo account, whilst simultaneously educating yourself on the market. There are so many free blogs and education portals you can use. Don’t underestimate the importance of a strong understanding of the trading platform and the markets you wish to trade on. Preparation is key. We recommend using the demo account for at least a few days, before switching over.
    Finally, remember that trading does not suit everyone. Those people that rush to trade without considering the intricacies of the platform or the market may end up disappointed, not to mention ending up with lighter pockets.
    Use paper trading as a mirror to yourself, in order to answer the following questions – am I ready to trade? Is this market suitable for me? If the answers are yes, it is time to open a real account!

Paper trading account 

So now it’s time for you to open a paper trading account. Start testing out the different trading strategies and techniques we talk about in our education section. You can start by identifying trends and then using simple moving averages, before moving up. Try and spot your own emotional reactions to different trade outcomes, as understanding how this affects your trades will be a massive advantage in improving your skill level prior to risking real money.

Click here to open a demo account now! 

We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.

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