Paper trading 101: What you need to know before trading with real money.
Paper trading is the logical and risk-free choice for anyone that wants to learn how to trade.
11:54 22 December 2020
Paper Trading 101: Everything You Need To Know About Simulated Trading Accounts
Jumping into trading penny stocks without any practice is almost certainly a recipe for disaster. The stock market moves hard and fast to the point where just two seconds of inaction can be the difference between a profit and a loss.
Fortunately, the vast majority of brokers offer a simulated account for traders to practice their skills. Most commonly referred to as paper trading, this is a risk-free option for new traders to practice their skills.
What Is Paper Trading
Online brokers offer a simulated version of their trading platform that looks and feels exactly like the real market. The simulations aren’t random, rather they follow the exact movement of all stocks.
But unlike the live market, a paper account has no monetary value attached to the trades. Rather, a paper account is designed to give a new trader experience trading with a bonafide software designed specifically for high-frequency trading.
Many brokerages are more than happy to provide prospective clients with a paper trading account. There might be some restrictions, such as it is only valid for seven days.
Source: TradeZero: Learn to master this platform before risking capital
Practice The Software
Learning how to use a trading software is just as important as learning trading strategies. For example, traders must set up what is called “Hot Keys” on their platform to become more time-efficient.
These are just shortcuts that execute a predetermined task by pressing one button on the keyboard instead of opening tabs or other tedious processes. Hotkeys can be fully customized according to the trader's preferences but most use something like F1 or Shift+F15.
Here is why it is vital to master Hotkeys.
Suppose, F1 is a Hotkey that triggers an automatic order to buy 1,000 shares of a stock at the market price. F12 is a separate Hotkey that triggers an automatic order to sell 1,000 shares of a stock at the market price.
This may be simple to master as F1 and F12 are on the two opposite sides of the keyboard. But what happens when we introduce many more Hotkeys?
Suppose F2 is a Hotkey that places a buy-limit order for 1,000 shares at 3 cents above the current bid. F11 is a Hot Key used to cancel all pending orders.
Remembering two Hot Keys was easy. But can you handle four? What about 10?
Pressing the wrong HotKey could lead to unintended consequences. A trader could end up buying an additional 1,000 shares of a stock that is falling when they really wanted to sell their existing position of 1,000 shares.
Not setting up Hotkeys results in wasted time and likely missing a trade. And in stocks, seconds matter.
Paper trading gives the trader plenty of live experience in mastering Hotkeys along with the dozens of other features on a trading platform.
Practice A Strategy
Paper trading accounts are also designed to give traders an opportunity to test run their trading strategy. Both new and experienced traders should test run their strategy on a paper account to see if it stands a chance of becoming profitable when real money is on the table.
However, practicing a trading strategy is a bit more complicated on a paper account since there is no actual money involved. The emotions are just not there and since there is no “skin in the game” the decisions taken on a real live account could be different.
Consider it like practicing a poker strategy at a free-to-play table. What you do with pocket two’s pre-flip at a practice table would certainly be different than what you would do in a similar scenario when real money is on the table.
As such, practicing a strategy on a paper trading account can never prepare a trader for the emotions they feel when their hard-earned money is at risk. But, disciplined traders that take risk management very seriously can learn to deal with their emotions after masting a paper trading account.
Just be sure not to mix up a paper trading account with a real account. Yes, this mistake does happen.
The most common next step after graduating from a paper account is trading very small amounts on a live account and gradually increasing the size of traders.
Paper Trading Drawbacks
Most paper accounts are 15-minute delayed so traders that look for cues and buying signals from a live news feed may find it impossible to practice their strategy.
Paper accounts may also fail to take into the true number of buyers and sellers in the stock at any given time. If you want to buy 2,000 shares of a stock that means that someone (or more than one entity) must be looking to sell 2,000 shares to complete a transaction.
So what may seem like a great strategy on paper may not translate to a profitable strategy in real life.
Also important to note, the quotes that are displayed in a paper account are delayed by at least 15 minutes and up to 20 minutes. This means that the price you see at 10:30 was the real price at 10:15 or 10:10.
Conclusion: A Zero Risk Offer
Paper trading accounts are by definition risk-free. There is absolutely no way to lose money so it is the ideal opportunity to see if trading stocks or other asset classes is right for you.
People that consistently make money on a simulated account should consider going live and trading a small amount at first to make sure trading is the right life choice. For others that don’t make money, it is wise to gather as much knowledge as possible through online classes or books and try again in a few months.