If you have never heard of this before, “paper trading” is a term that is coined from the stock exchange market wherein investors who want to practice would write their investments on paper and then follow the market movements. To be able to optimize this, it is crucial that you have a reliable paper trading platform where you can properly monitor the movements of your investments.
There are a lot of trading markets that attract a number of new investors where some of whom are already long term traders while others are those who are looking to make shorter-term trades. What is common to all new traders is that there are some understandable hesitation and concern at losing money from trading.
Even so, any type of trading has its own
risks, thus, brokers will offer a lot of tools so that it can help first time
traders for them to improve their trading skills. It may technically a new
term, yet, paper trading belongs to one of them but what it is commonly called
is trading on a demo account.
A paper trading platform is a simulated
market environment wherein the participant will write down his or her buying
and selling decision other than placing actual orders at a brokerage. In fact,
it can be a simple process with a few numbers that are being jotted in a piece
of paper, or as complex as with spreadsheets breaking multiple elements into
component parts for the participant’s reflection and analysis. For the new traders, they will often need instructions
to paper trade until they will learn basic strategies, while for the
experienced traders, they utilize the practice from time to time most
especially if they are working on new ideas and approaches.
Ways
to Use Paper Trading Platform
One of the simplest approach to paper
trading identifies an appealing stock through a chart on a website or an
analysis by a market personality, and then writes down the ticker and then
choose a time to place hypothetical buy order or sell order if the participant is
desiring to sell short. The newbie will jot down the opening price if they are
entering at the start of the session, or looks at the chart and ticker during
the trading day and then pick a spot that will look like a good entry.
Making the choice of entry price and time will considerably vary, this will depend on the basic tutorials that are used to learn the trading game. The same will hold true during the management phase, as when deciding where to place the stop and how to should to it be to hold the position. Whatever the approach may be, an exit price is then finally written down and then the novice will repeat the process until there is enough data that is gathered to be able to analyze progress.
Even though the use of pen and paper will
work perfectly well for paper trading, the use of spreadsheet will provide a
more powerful analytical tool for detail-oriented individuals this allows them
to add additional columns to capture the following:
- The stop
placement - The time
of day - The volume
- The sector
- The holding
period - The day of
the week - The market
internals which includes index direction and the volatility of the market
By using trade simulators, this will offer
the most potent approach to paper trading because this will enable the novices
to set up workstations that can mimic actual real-time market conditions. There
are a number of brokers out there who are offering this service for free to
their customers, and that is by letting them use the same trading software as
real money players. This is an invaluable connection because this allows a
seamless transition from a simulated to an actual trading environment once the
student is now ready.
There is also a final approach that can still be used at any time that is even during the weekends when the financial markets are closed. You can have your friend or spouse and then pick a technical chart at random, and then print it out and then hand it to you with the right side being covered by the second piece of paper. You just have to make sure that the chart has all of the technical indicators necessary so that you will want to use it in the real-work trading. You can then take the second sheet and move it to the right one price bar at a time while you choose where you want to buy and sell.
Benefits of Paper Trading Platform
The following are some benefits of using a
paper trading platform:
1- There is no risk involved
This platform
costs nothing, so you cannot lose money with bad decisions or because of poor
timing. This will also allow you to observe all of the errors in the analytical
process so that you can try to begin the strenuous work of building a
well-defined trading edge.
2- You can be stress-free
With trading,
this will evoke two emotions and these are greed and fear, this often blinds
the participants to key information that is needed to observe effective risk
management. With paper trading, this bypasses this emotional roller coaster so
that the new participant can start to focus fully on the mathematical process
and not the drawbacks.
3- It is a good place to practice
The participant
will be able to gain experience in every element of the trading process from
the pre-market preparation up to the final profit or loss taking. When one is
accessing the broker’s simulator, they will be able to learn how to use real
money software in a relaxed environment, wherein the wrong keystroke will not
trigger a financial disaster.
4- It can help gaining confidence
By making a series of
complex decisions that gets rewarded with theoretical profits which can go a
long way in building the novice’s confidence so that he or she can do the same
thing when there is already real money at stake.
5- It helps with the statistics
By doing paper trading for
several weeks this ups to a month build useful statistics about the new
strategy and market approach. The result is likely going to be discouraging,
which will force the next step in the new trader’s educational process which in
turn will require additional paper trading and data sets.
Of course, there is nothing perfect, even
with all of the benefits cited, there are also some key limitations when it
comes to paper trading. These limitations are the following:
6- Data on the market correlation
With paper
trading, this, unfortunately, fails to address the broad market’s impact on
individual securities. The majority of the equities move in lockstep with major
indices in times of high correlation, and this is common when the Market
Volatility Index (VIX) rises. While the results may look great or terrible on
paper, there are broader conditions which may have created the results other
than the virtues or the pitfalls of the individual position.
7- Slippage and Commissions
There are real money
traders who deal with all sorts of hidden costs from slippage and commission.
This is even aggravated by wide spreads that are poorly captured in most of the
paper trading techniques. One example is that the momentum stock that you think
you are buying on paper at $50 may cost you $50.50 or even more in the real
world.
8- Emotional reality
It can be said
that paper trading does not address or evoke real-world emotions that are being
produced by actual profits or losses. In the real world, however, there are
many traders who cut profits short and then let losses run because they lack
the market discipline. Those which are self-destructive calculations does not
come into play in terms of dealing with hypothetical numbers.
9- Formfitting
Paper traders often pick out
ideal entries and exits, thereby missing the minefield of obstacles that are
being generated by the modern computer-driven environment. These shakeout
levels become all too obvious to real-world participants who have already watched
dozens of technically sound positions go up in flames especially when
algorithms shift into the predatory mode and then seek out their stops.
With paper trading, this will benefit new
participants by letting then act out on key steps in risk-taking, ranging from
the selection of securities to the final exit, but the process only has limited
value because it underplays the impact of index correlation and emotional
reactions in a typical market day. Furthermore, this does not address the
impact of algorithmic strategies that will routinely target the flesh-and-blood
crowd.
The Bottom Line
Considering all of these, most of these novices should spend a considerable amount of time paper trading their ideas and strategies before risking real capital, thereby gaining as much experience as possible. The exercise will be able to pay excellent dividends, thereby shortening the learning curve while allowing limited profitability much earlier to initiate as compared to new participants who tend to pass on the opportunity. Once one is already able to learn the basics, you can then develop your investment strategy, get a few green weeks in the simulator, and then move to trade live with small size.
