What is paper trading and whether beginners should start with paper trading or real trading?
As a beginner to trading, where exactly do we start from and what do we do? This question is asked by many people who want to start their trading journey but do not know the path or do not receive any guidance. First, trading can be done in two ways mainly, one is paper trading and the other is real trading. Let’s talk about paper trading first.
What is Paper Trading?
Paper Trading is a way of trading without using actual money. The term ‘paper trading’ or ‘paper trade’ came into being at a time when trading was conducted physically at the exchanges themselves instead of through an electronic platform. Traders and investors used to practice on paper by writing down their trading strategies and ideas and manually comparing them with the price movements of stocks in every single trading session.
In current scenario, people uses certain software that records the price of stock we are buying at and when we sell the stock , what price we are selling at. The software provides virtual money for trading in stock market. Popular softwares are trading view, moneybhai etc.
Example: Let’s say the price of Tata Steel is currently at Rs.918 and we want to buy 30 stocks of it. Now we go to the paper trading panel of tradingview.com and input the information about quantity and our buying price, which is let’s say Rs.918. Later when the price hits Rs.920 we write down 920 as selling price. We consider this as a profitable trade as we made Rs.2 profit on 30 stocks. Although we didn’t make any actual money but it was a successful trade.
What are the advantages of Paper Trading?
- TOOL FOR PRACTICE : It is a really good tool for practicing trading , just open any chart of a security and analyse patterns so you can be a better trader. Practice is very important in trading and by paper trading you are able to do the same.
- RISK FREE : In paper trading, no actual risk is involved as there is 0 chance of us losing our money because we don’t use real money.
- ELIMINATES STRESS: In this, our emotions don’t affect us and we are able to make better decisions because fear and greed can make a trader make mistakes which then leads to losing money in the actual market .With adequate practice using paper trades, you can learn to keep your emotions and your stress levels in check.
- STRATEGY FORMULATION: One of the main advantages of paper trading is that it helps us in creating multiple strategies as we can try and test various combinations of candlestick patterns, time frames, volumes etc . Then, this strategy can be implemented in actual trading.
What are the disadvantages of Paper Trading?
- ACTUAL PSYCHOLOGY IS ABSENT: Emotions play a major role while doing trading. How to remain calm during bear market, how not to panic when you put wrong bid or stop loss in broker terminal, importance of stop loss, risk tolerance level etc. These things happen in the actual market and not while paper trading . When these things happen , pressure or stress is created which enables us to think of a solution but these emotions are totally absent in paper trading .Hence , paper trading is at a disadvantage here.
- HIDDEN REAL COST: When we paper trade , we don’t take into actual costs and hidden commission and charges that are charged by the brokers. If this is not considered then our profits can be lower than we expect.
Paper Trading vs Real Trading
The Bottom Line
The best way to start with your trading journey is to actually start with real trading. In real trading , we actually get to come across the emotions of fear and greed which are absent in paper trading.
The sadness that we get after losing actual money enables us to make better calculative decisions and it motivates us to perform better.
Actual mind pressure matters a lot when we are trading . When there is pressure created on a human , he tends to find some ways to escape out of it . This is why real trading tests the actual pressure and fear a person can bear.
Let’s say there are two instances, one where we pay for a gym membership and other when we get it for free. In which case are we more likely to go to gym and exercise? Yes, the one where we have actually paid for it because our real hard earned money is involved.
We also can take another example of car driving. Say we want to learn how to drive a car , can we just do that by downloading a car racing app and started driving on it ? No , we cannot. Similarly with trading we need to learn it through actually doing it because the circumstances of fake and real are completely different.
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