What is Paper Trading?
Paper trading is a simulated trading environment that allows the user to experience market activity without losing or winning any money. The orders are entered and executed, the participant can view the outcome of the order – all in a simulated environment, without the exchange of money.
Traders can test and practice investing or trading with different financial securities without committing any real money and thus not exposing themselves to the risks of trading with money. It is the perfect way to experience what the markets are like without using any money.
Who Should Use Paper Trading?
Paper trading is used by different levels of market participants. Beginner traders use this platform to formulate a strategy and experience the market movements in a simulated environment.
This helps them form a strategy and learn about the different nuances of the market. While professional traders use paper trading environments to test new strategies and approaches.
Why Indulge in Paper Trading?
Theoretically, paper trading helps improve the skillset of any trader and shows exactly how much profit/loss could be made had the participant placed the same orders with real money. Many believe that paper trading leads to reckless trading and even misdemeanor when it comes to trading plans. Although that is true for a lot of people, those that stick to their trading plans get great results from Paper trading.
Paper trading has many advantages. Some of these advantages are:
- The main advantage of paper trading is you get to see your strategy play out without risking any real money. Though you might miss out on the opportunity to make money, you save your money from being taken away by the markets if you were wrong.
- Beginners can make use of this environment to play and tweak with the different options available to them regarding all different financial securities. Paper trading is widely used by a lot of beginner traders before they enter the markets because book knowledge is one thing, and seeing your strategy play out on real markets is another thing.
- Experienced traders can use this environment to test out new strategies or approaches. Many experienced traders even use this environment when they are trading new financial securities – ones that they have not used before.
But if You Keep Trading on Paper, When Will You Start Trading With Real Money?
How do you go from buying simulated financial instruments to investing with real money? Simple! You deposit money into your brokerage account and start trading! Is it really that simple? Well, yes and no.
You could easily make the transition by depositing money and using the real account to make all kinds of financial movements that could end either way. You could even transition from paper trading into a day trader to keep a track of market phenomenon on an hourly basis.
These are a few things you should keep in mind if you want to transition profitably into buying stocks online:
1. Find Your Own Way:
If you are expecting someone to come and give you a tool that will make you endless money, then keep waiting. You have to find your own genre of stocks or other financial instruments that you can follow.
You have to ensure that these financial instruments are the ones that you want to continue studying for the duration of your trading career. You need to be able to understand the news that moves those financial instruments.
2. Make a Trading Strategy and Stick to It:
Make a trading strategy with all the market knowledge you possess. Spend time with the charts, spend time understanding the news and devise a trading strategy, and implement it on your paper trading environment. Ensure all your calculations lead to correct entry points and exit points. Make any necessary changes.
3. Try New Setups:
Yes, you have seen a couple of people implement the same strategy, and they have made money, but who is to say when the strategy will stop working? Will you really be financially independent if you are relying on someone else’s trading strategy?
You have to try new setups yourself to find out what works for you. You can do this in a paper trading environment without the need to risk any capital.
Making financial movements in a simulated environment helps you open your mind to different ways to view the markets and maybe even help you make an effective trading strategy! There are many factors that move markets, and recognizing which ones you should be giving weightage to is critical. Thus it is imperative to know the effects of using different setups, these can be used by giving different weightage to different factors.
4. Do Not Try to Do Everything at Once:
You have been studying the financial markets for a while now, and you have developed an all-round interest. You want to trade everything you can. This is the rookie mistake that leads to blown accounts. The way to enter the markets is with patience. You cannot enter like a thief and leave without the market taking a cut.
To find success in trading the markets, you need to know exactly what you want. Just because the financial markets interest you, you cannot expect them to be good to you. The market senses no emotion – although it has the power to put you through a lot of emotions, which brings us to our next point.
5. Use Bots:
First, ensure your trading strategy works on your paper trading environment. Once you have ensured that your strategy is effective and you are happy with the returns, try using a bot to place market orders. Once you have put a bot to work, following a sound trading strategy, if your strategy plays out correctly, you end up making a profit.
Making use of bots enables you to make razor-sharp entry and exit points. Using a bot has more than one benefit. By using machine learning practices, you can train the bot to “learn” from past data and enhance your trading strategy to be dynamic with the markets.
Final Words of Advice
As the whole world transitions into a digital reality, there are many tools that can enhance the trading experience. One way to ensure consistency within the markets and ensure effective entry and exit points is to use bots. Apart from being able to take prompt action, the machine learning function of artificial intelligence could also make major contributions to optimizing trading strategies!
There are many factors that make algo bots a smart solution to trading, and Alpaca is one such company that allows you to execute your algo trading bots without charging any kind of commissions!