May 12, 2021

What is Paper Trading?

What is Paper Trading?

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Paper trading is a way to practice entries, entries, and position sizing by documenting signals outside the markets without putting real money at risk. Paper trading got its name as it was originally done by writing trades on paper with a pencil or pen to simulate making decisions in real time to see what the future outcome would be. Nowadays, this is done primarily on a broker’s or website’s stock market simulator so entries are made on software and the outcome of gains and losses is displayed for the trader on a computer screen. Spreadsheets are also used now to log and analyze paper trading decisions and returns. 

It is still called commonly called paper trading and is a way to both practice identifying trades to take and watch and learn about outcomes. It is also good for new traders to do so they spend part of their learning curve without real money being at risk. The downside is that paper trading doesn’t show the amount of stress, ego, and emotions that are involved in trading with real money when it is put into a trade with a risk of loss. Paper trading is purely for learning how to execute a trading system analytically and technically it does not reflect the psychological side of being a trader. 

Unlike backtesting that shows how a strategy would have played out in the past, paper trader recreates the process of trading in real time and shows what it will take in time and effort to use a system trade by trade. It is much different to experience a losing trade, losing streak, and drawdowns in real time versus seeing it play out as data in backtesting software. Paper trading at least shows some of the frustration that occurs and also perseverance needed to go from trade to trade with an unknown outcome as they play out. 

Paper trading can be an early part of the learning process for new traders but it does not reflect the realities of trading real money just the real time process not the real time need for mental and emotional self control.