we will discuss the Paper trading benefits and limitations in detail. But first, let me explain it once more. Paper trading is simulated market trading in which trader can buy and sell the stocks with the virtual funds. Investors can practice by simulating purchases and sales of stocks and other securities with the live price feed. It allows traders to place the order and execute different transactions and all other activities in simulated risk-free environment.
Benefits of Paper Trading
Now Let’s have a look at the key benefits of paper trading. There are a lot of advantages for new traders as well for the experienced once.
Closely Resemble the Actual Market
You want real market experience with no risk the paper trading is the authentic way for doing it. Simulators give you the real feel of trading. As you will get access to all of the facilities which a real trader uses to support his decision making.
As I discuss earlier paper trading used virtual funds, and you can’t lose your real hard-earned money when you make bad decisions. Even your poor timing and bad strategy will not make you suffer.
No Stress In Paper Trading
Real traders know it well that how much stress trading brings with it especially when your trades are floating. For a new trader, trading evokes the twin emotions that are greed and fear which often blinding the participant to key aspects of information for effective risk measure. In paper trading, the trader can trade without stress which offers him to learn with ease.
The trader in paper trading gets to experience in every element of trading and trading process. He can learn to trade from the pre-market analysis to final profit and loss.
Learn Basics of Trading Software
Paper trading provides very first opportunity to handle the trading software the same piece which traders use for real trading. In a paper trading relaxed environment, because in paper trading mistakenly pressed keystroke wouldn’t trigger a financial disaster.
They learn to handle it in a better way. Which ultimately helps them when they move on to real trading.
Learn the Use of Indicators and Technical Tools
Paper trading environment is best learning all available indicators and trading tools which are available to support decision making and strategy as well. Applying again and again and getting command over those is a risk-free opportunity for trader where he can take positions and test the tools and indicators with live data.
Paper Trading Build Confidence
It is the best tool to build confidence. When a trader makes a series of complex and tough decisions and rewarded with the hypothetical profits. That ultimately build confidence in novice trader. That is not possible when real money is on risk.
Build your first Strategy in Paper Trading
Build your strategy when you are on paper trading because here in this stage you can test the depth of your trading strategy. Revisions and amendments will not cost you even a penny.
When you are doing paper trading for a longer time period like from a month to a quarter. You can build statistics of your trading strategy which will serve you to decide about the revisions and amendments or to adopt in the same way. Next step is decided on the basis of results.
Access Wide Range of Markets
In the paper trading buying and selling stocks is fun as trader experience the same without stress and emotions. So many new traders wish to test the other market like ETF’s Mutual funds, and that is very possible to trade. A good simulator will also enable you to use the leverage.
Charts are included in Simulator
Charts are included in each and every simulator so you can make your own analysis and research for your trading decisions. While on the real account you have to pay the fees for the same facilities.
Test Order Types and Market Conditions
To become a successful trader in the real trading market you need to become familiarize with the order types and market conditions. In the paper trading, you can practice getting hands on these. You can learn to choose the best type of orders for your strategy and trading style.
Position Sizing and Money Management
It must be the main objective of your paper trading as on the simulator you can better learn it as the wrong decision will not cost you and you can learn how to decide the size of your positions and what money management techniques suits best with your trading strategy.
Limitations of Paper Trading
Along with a lot of benefits, there are some limitations of paper trading, let’s have look on limitations,
In the paper trading, you will not experience any slippage as all of your orders and positions got executed on the same price where you wish to get in. While on the real trading you may experience slippage in even of increased volatility. This slippage is caused only on the market orders and to avoid that pending orders are used.
Paper trading will not address the broad market’s effect on individual securities. The market correlation did not work well in it.
In the paper trading environment, traders are not bothered the commissions. But in the real trading environment trader have to deal with all sorts of hidden commissions. Spreads may be widened in the real market that will cost more.
No Effect of Emotions and Greed
These two are connected with human nature. When a human being deals with the real money he becomes emotional and greedy. A paper trader does not feel the impact of these two but in real trading, these two come into full play.
Paper traders only choose to trade with the exact entries and exits and miss the minefield which is generated by the modern trading.
Delayed Data in Paper Trading Simulator
Not all of the paper trading account provides real-time data. Majority of simulators do not use exactly live feed but a 15 to 20 minutes delayed feed. Even there are simulators which use fake data to create the same environment.
No Deep Book Access in paper Trading
In the paper trading, there is not deep book access. In all of the simulators fills are simulated from top of the book.
Penny Trading for US Stock options
In paper trading, penny trading for US stock options Is not supported. You may submit your order but it will not be filled.
Paper Trading Simulator Ignore Reminder of Exchanges
In the real market, we experience partial fills while in the paper trading there is no concept of partial fill. The simulator ignores all the reminders from the exchange.
While keeping in view paper trading benefits and limitations, I suggest to not trade on the simulator for a longer time. Like one-month trading is enough then move on to live to trade with your preferred broker.