Importance of a Paper Trading Platform for New Investors

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.