All beginner investors prefer to practice trading in a simulated environment as a safe way to test the waters before putting real money on the stake in the live market. A paper trade is a simulated trade that allows a juvenile investor to practice trading without risking capital.
This simulated environment is designed to help aspiring traders try options and different market strategies without worrying about losing any money. Paper trading gives a brilliant opportunity to test the knowledge and strategies of a trader.
Paper trading can teach market analysis to investors like in a game. A paper trader learns to record all trades to keep track of trading positions, portfolios, profit, and loss.
Let us understand how paper trading can help you get ready for the real trading world:
1. No Paper Required
Paper trading is named after the practice of writing entries and exits on paper. In reality, electronic paper trading provides an immersive simulation experience. The paper trading uses a trading software that allows aspiring traders to practice on the platform they will be used to place trades.
2. The Simulation Account
Paper trading platforms come with a built-in simulation account, specifically designed for demo trading. These accounts behave similarly to a live account to monitor the cash balance, profit & loss, and other financial parameters.
These simulation accounts can be customized and reset at any time at your convenience. You can also add additional simulated trading accounts within the Accounts tab for better exploration.
3. Trading Rules & Terminologies
Attempting to trade without any sort of basic training or knowledge is a recipe for a complete disaster and loss of money. You can learn these terminologies anytime on Google but remember, just because you read a book on swimming doesn’t mean you’re ready to go swimming out in the sea! Practicing the lessons is of utmost importance.
Paper trading can help you gain a very strong knowledge of day trading rules and terminologies. One of the challenges with trade learning is the overwhelming amount of information in the market. It’s always a better idea to practice before implementation.
4. Zero Monetary Risk
Even though live and real-time market data is used for paper trading, it is conducted in a simulated account, so there is absolutely no monetary risk. This helps traders to gain confidence in their trading strategies.
You can take the liberty to explore the platform at your level of wisdom. Learn from the shortfalls and make significant improvements in your methodologies.
5. Learn From The Tools
Utilize the free advanced charts, back-testing, and trade simulation that comes free with the platform. Paper trading provides comprehensive trading graphs and reports to aspiring traders to learn from the parameters. You can also filter all these parameters by instruments and get information on the accounts traded.
As an aspiring trader, you have two choices with you. You can either adopt a strategy that is actively used by successful traders, or you can create your own unique strategy and implement it in paper trading to accept or discard it.
If you create your own strategy, prepare yourself to spend months or years testing and refining it before you can trade with real big money.
7. Track Yourself
The paper trading platform automatically tracks your performance as it would if you were using real money. You can analyze your paper trading results in detail to understand what is working and what is not. Analyze your mistakes, cross-check your actions, and figure out better strategies for the real market.
Paper trading alone is not enough to make you a successful trader. You need to improve your trading plan. You need to go back to the old trades and analyze your play. Look for patterns, observe the things you were good at, and the factors that led to losing trades.
8. Record Everything
When learning from your paper trades, don’t simply notice your entry and exit prices. Record as much detail as possible for all your trades.
Record the following significant data for your analysis –
• Why did you enter the trade, and at what price?
• Why did you exit the trade, and at what price?
• How many shares did you buy, and why?
• What is the risk/profit ratio?
• Did the trade go as planned? If not, why not?
Keeping track of all of these details may seem hectic in the beginning, but it will become a tradition after a while, bearing significant fruits to you. When you come back to analyze your trades after closings, you will have enough information to draw a conclusion of your profit or loss.
9. Analyze & Trade Markets Through Free Simulation
Paper trading can be the cornerstone of your trading education. Aspiring traders learn the technical and basic fundamentals to understand market analysis. This enables the traders to analyze future contracts and time frames to focus on.
The simulated environment is designed to mimic the live trading market as closely as possible. With technical analysis tools such as indicators, drawing tools, and chart styles, paper trading helps you to prepare for live trading through a detailed experience.
10. Be Realistic
Paper trade with an amount of money that you would realistically trade with, in the real market. This approach will help you feel every single loss and gain. If you lose $100 on a fake $100000 account, you won’t feel so bad. But if you lose $100 on a $1000 account, you will feel the heat.
If you are planning to make the most of your paper trading experience, be realistic. Try to follow the exact strategy on the simulating environment that you plan to use with your real portfolio. This will prepare you for the practical obstacles in order to succeed.
You will find plenty of paper trading app in the market to refine your knowledge and strategy. Alpaca is one of the great tools in the market that can help you get better results.