What if I told you there was a way to develop your skills as a trader without risking actual money?
There is a way, and it’s called paper trading.
Paper trading is a method of virtually testing out setups and strategies without risking real money. It can be a great way to develop skills and gain confidence before you switch to live trading.
Here’s a thorough primer on paper trading — benefits, drawbacks, simulators, and how to use it.
Table of Contents
- 1 What Is Paper Trading?
- 2 What Is a Virtual Trading Account?
- 3 Advantages of Paper Trading
- 4 Disadvantages of Paper Trading
- 5 Why Should You Practice Paper Trading?
- 6 Paper Trade to Test Order Types and Market Conditions
- 7 Live Trading vs. Paper Trading
- 8 The Psychology of Paper Trading
- 9 How to Start Paper Trading
- 10 My Paper Trading Tips
- 11 Remember: There Are Differences Between Paper Trading and Real Trading
- 12 Paper Trading Example
- 13 Trading Challenge
- 14 Frequently Asked Questions About Paper Trading
- 15 Conclusion
What Is Paper Trading?
What is paper trading in the stock market? Simulated trading.
On the surface, paper trading is just like regular trading: you choose stocks, put in orders, and watch how it all plays out.
The key difference is that you don’t trade with money when you’re paper trading. The transaction is completely virtual. No actual money enters or exits your account as a result of paper trading.
Technically you could practice paper trading using the newspaper and a pencil and paper — that’s why it’s called “paper trading.”
But nobody really does that anymore. Simulated trading platforms make it easier to paper trade.
Today’s paper-trading platforms look and feel nearly identical to real trading platforms. So you can get the feel and sensation of executing a trade. It’s not all the same as a real trade … but more on that in a bit.
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What Is a Virtual Trading Account?
A virtual trading account is the “account” you open on a simulator or paper trading platform. More on those shortly…
The virtual account comes with a virtual cash balance to trade with. The amount varies on the platform. You may start with $500,000 or even $1 million.
Or you may choose your starting account size. It’s more realistic to set up an account similar to what you’ll trade with in the real markets.
Advantages of Paper Trading
One advantage is that you can try trading without risking capital. New to trading and not ready to risk your hard-earned money in the market? Paper trading is a great option.
But it’s not just for newbies. Experienced traders can use it to test ideas and new strategies. With no risk.
The key is to treat paper trading like real money. So when you transfer over to a live account, you stick to the same rules and setups worked for you with paper trading.
Disadvantages of Paper Trading
This is the biggest disadvantage of paper trading: there’s little to no emotion in the trade. It’s just different when there’s real money on the line.
Controlling emotions in the market is hard. So many thoughts go through your head while you’re in a trade. Some new traders say they start shaking and sweating when in a trade…
You can be the best paper trader in the world, but when it comes to trading real money, you might stink. Especially if you can’t keep your emotions in check.
I say this a lot … “If you only focus on the money, you have the wrong mindset.”
It can impact your decisions. You may sell too early, and the trade would’ve worked just as you planned. Or maybe you hold a loser too long because you don’t want to lose money.
In paper trading, it’s easier to focus on the setup and stick to your plan. Deep down, you know it’s not real. The challenging part is remembering that when real money’s at stake.
Why Should You Practice Paper Trading?
A lot of new traders scoff at the concept of virtual trading. If you’re not actually making money, why bother with paper trading?
But again, that’s the wrong mindset. There are many reasons why paper trading is worth your time…
Get Your Feet Wet
For new traders, the entire process of choosing stocks and executing trades can be overwhelming. There’s a lot to consider, and the pace is fast.
Even if you study my videos and lessons, once you actually start trading, there’s still a big learning curve. It takes time to get used to being in the market.
Once you learn the market basics, how to research and track stock patterns, and understand how to execute trades well, paper trading can be a great stepping stone to live trading.
Paper trading offers you a chance to put what you’ve learned to work. You get to apply your knowledge using realistic trading scenarios.
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Save Your Money
True, paper trading doesn’t involve actual money. So you won’t earn anything through your efforts. But you also won’t lose money.
All traders lose money. But those losses can be huge early on. It just takes time to learn how it all works. That’s why I always suggest taking small positions, especially at first. Gain experience and learn the process before scaling up.
Try New Setups
You have to find your own unique way of choosing stocks and executing trades.
Maintaining a trading journal can help you figure out and refine setups that are working. But sometimes you just need to try something new. The market will shift and your old setups may not work anymore.
Test out new setups or strategies through paper trading. Never think that one strategy will always work. You constantly have to refine based on what’s happening in the market now.
Paper Trade to Test Order Types and Market Conditions
You need to familiarize yourself with the different order types.
Order types include stop-loss, limit, and market orders. Check out this post for more detail about different order types.
In paper trading, just as in real trading, you’ll need to choose the right order to suit the market conditions and your personal risk tolerance and trading style.
Live Trading vs. Paper Trading
Paper trading is kinda like trading with training wheels. It can be helpful at first … But there will come a point when you need to take the training wheels off and ride on your own.
Since paper trading doesn’t involve real money, you don’t get the full risk/reward experience as with trading. There’s no real risk, so you can develop a distorted sense of security.
Paper trading is a great tool, but be careful about using it too long before you switch to live trading. Or use it sparingly as you test out new trading methods.
The Psychology of Paper Trading
Paper trading psychology can be complicated. On one hand, it can help bring you up to speed and gain confidence as a trader.
However, there’ll always be part of you that knows it’s not real money.
So, you may seem cool as a cucumber while paper trading. Then when you enter a real trade, you might begin acting irrationally or on emotion. When it’s real money, emotions can get involved.
This is one reason I suggest not paper trading for too long. And once you go live, keep your positions small.
It’s all about experience. You may not profit much with small trades, but you can learn a lot about your personal risk tolerance. Plus, you can minimize losses and better understand trading psychology.
How to Start Paper Trading
Paper trading is easier today than ever before. Here’s what you need to know to get started.
Setting Up a Paper Trading Account
Setting up a paper trading account is easy. Multiple websites and platforms offer paper trading either for free or as a part of their services. Sites typically require basic information and that you set up an account with them.
Financial simulators imitate the real market. You get fake cash to practice buying and selling stocks and options. These simulators are based on real market movements. Some simulators are in real time and others have a time delay.
You’re probably familiar with fantasy sports where you pick and trade players. This is an example of a fantasy simulator. It’s not real and they typically charge users to use them.
Choosing a Paper Trading Simulator
There are a few options for paper trading simulators. Some are integrated with a brokerage account as a way to test out their platforms. Others are only platforms developed for charting and tools. You’ll still have to execute real trades through your broker … when you’re ready for that.
First, I must note that I’m in no way affiliated with these companies or developers — except StocksToTrade, which I helped design.
Here are some of the big simulators…
Personally, I find the paper trading module on StocksToTrade to be the best. It was created by traders for traders. In my opinion, it has a user-friendly platform.
Full disclosure: I proudly helped develop the StocksToTrade platform.
We went through a lot of testing to design this program. It’s helpful to use the analytical tools in tandem with the paper-trading program. This can help you prepare for live trading — delving into research and executing trades based on your careful analysis.
You can also create multiple accounts. In each account, you can change the amount of your capital. This allows you to try out different strategies, either with a small or large account.
You can also change the commissions. So you can try a fee structure based on a per-share basis or a flat-rate commission. Or maybe you’ll use commission-free a broker. These options help make the paper trading experience more real.
TradingView is a charting and analysis platform. It has different pricing tiers based on your needs. TradingView describes itself as “easy and intuitive for beginners, and powerful enough for advanced chartists.”
It includes real-time data and charting software, and it doesn’t require any software installation.
This network also includes a paper trading module, so you can learn before you risk real money. When you’re ready, you can open an account with supported brokers, which is connected to your TradingView account.
TD Ameritrade is a big financial firm that offers a variety of different services. Its Thinkorswim trading platform features tools and resources you can access from your desktop or mobile device.
While you can use Thinkorswim for live trading, the platform also offers paper trading via its ‘paper money’ module.
Webull is a discount broker with zero commissions and zero deposit minimums. It also offers a free paper trading simulator. A Webull paper trading account starts you off with $1 million virtual cash.
Most people won’t open a live trading account with a million bucks … So try to only trade using the amount you’d have in your real account.
Remember, the idea is to keep paper trading as close to reality as possible. You want real data on realistic trades. Its paper trading feature is free to try if you sign up for an account.
E-Trade doesn’t offer a free demo paper trading account. But you can paper trade on E-Trade if you have an account. You can switch between your cash account and paper trading account at any time.
It’s not ideal if you don’t have the money to fund an account yet.
TradeStation paper trading is available for clients. But again, you need a funded account to have access to it, and that includes paying fees on that account.
That may deter newer traders. You can’t try out the platform without putting money in an account first.
Fidelity offers a demo feature on its Active Trader Pro platform. But it uses delayed data. That’s a problem if you already watch the market in real time.
It’s kinda like cheating … You can’t really go back and try a trade if you already know how it will work out.
Robinhood doesn’t offer a paper trading platform or account option. That doesn’t really surprise me. It’s a deep discount brokerage with minimal services and tools.
As far as the paper trading options listed above that offer a paper trading app … know the limitations. If you plan to day trade based mostly on technicals, using an app may not be ideal. Apps may not give you accurate trade data, and that can sink trades. So what’s the point?
Executing day trades is a lot different if you use a laptop with charts, real-time data, and Level 2.
Creating a Paper Trading Portfolio
With paper trading, you can open an account and assemble a portfolio. Start by setting up a balance before researching potential stocks to trade.
Depending on the platform, you may need to answer some more questions or tailor some account settings. Regardless of the platform, it shouldn’t take long to get started.
My Paper Trading Tips
Before you start executing paper trades, consider these tips…
Be as Realistic as Possible with Paper Trading
This is important: be as realistic as possible with your paper trading account. Otherwise, it won’t do you much good.
When you set up your paper trading account, you can set your balance to any number you want. So choose an amount that’s close to what you’ll have for executing live trades.
Just because you can set up a paper trading account with a $200K balance doesn’t mean you should.
If anything, it will reinforce the idea that paper trading is “play money.” It can keep you from making meaningful progress with the exercise. It can make you feel like you’re capable of taking ridiculous positions, unlike the ones you would take in real life.
For example: If you have $4,000 to trade with, set up your paper trading account with $4,000. If you have $25,000 to trade with, set up your paper trading account with $25,000. Got it?
Also, be realistic in your approach to trades. Seek out the types of trades you’d approach as a live trader.
Yes, you can try a variety of methods. But as you track your trades and see what’s working, double down on the approaches that serve you best.
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Record and Track Your Results
Keeping a trading journal is a smart way to track which setups work. This helps you refine your methods. You want to focus on and improve what can actually work.
But don’t wait until you’re trading live to track your results. Make it part of your routine when you start paper trading. It’s a good way to develop a good habit. And you’ll see the benefit of reviewing your past trades from the get-go.
Remember, paper trading is most beneficial when you treat it as much like live trading as possible.
So be sure to keep note of as much as you can…
- Your entry and exit points
- How many shares you purchased
- Why you decided to buy the stock
- The risk/reward ratio
- How the trade went
- What you learned
You can also note mistakes, your mood, the time of day, or what you did right. It all can help you improve over time.
Analyze Your Past Trades (Successful and Unsuccessful)
Take your trading journal one step further: analyze the results. When you analyze your data, even paper trades, you can learn a lot about how you trade. It helps you refine your trading techniques.
For example, if you try to play morning panics with a short-selling setup (like this) but your results fall flat, it’s time to change. Examine your methods, improve your setup, or hit the books and study more.
Break down what’s going wrong in your trades so you can fix the issue. For instance, maybe you find you don’t understand the process of trading well enough. It’s probably time to revisit some of my study guides and webinars. Remember, education is key to being a self-sufficient, adaptable trader.
When you identify where you struggle, make a list of what you can do to improve. Setting specific goals delivers better results.
Focus on Developing Your Trading Confidence
Here’s one of my key tips for paper trading: use it as a tool to develop confidence for live trading.
Paper trading can become a crutch. You might use it as an excuse to keep from live trading. Putting real money on the line is scary. It’s daunting to make the jump to live trading. But at some point, you gotta take the leap.
Paper trading is great for new traders. There’s no way you’ll win every time in trading. But with practice, you can better understand different setups.
You become familiar with the process of making a trade and get a chance at putting your research to work.
It can be exhilarating to see a paper trade go well — even if you’re not making money. Use this experience to help you build your confidence.
Remember: There Are Differences Between Paper Trading and Real Trading
This is another key tip … paper trading is different from live trading.
You can make it more realistic, but there’s no actual money on the line. It’s easier to maintain a level head in your trades.
This can lull you into thinking that trading is no big deal. You won’t be prepared for the emotions of live trading. And when real money is at stake, emotions definitely come up.
Use paper trading for what it is: a tool and an exercise.
There’s another crucial difference between paper trading and live trading — liquidity. When you paper trade, there are always shares available. Your entry and exit are simple.
That’s not the case in the real markets. You may not be able to buy or sell at the price you want when you want. You can miss trades or get stuck in trades. It happens to every single trader. Keep that in mind while you’re learning the ropes.
Paper Trading Example
Here’s an example of why paper trading won’t work if you aren’t realistic…
Let’s say you buy stock XYZ. It’s trading at $1, and you buy 1,000 shares. The stock would have to move up so that you can cover the cost of the commission alone.
Say it’s an OTC stock. So the commission is typically $4.95 per trade. To profit, you need to cover your commission on the buy and sell of the trade.
- You buy 1,000 shares of stock XYZ at $1 = $1,000
- Buy commission = $4.95
- Then, you sell all your 1000 shares of XYZ at $1.1 = $1,100
- Sell commission = $4.95
- $1,100 – commissions = $1090
You made $90 on the trade. You also need to pay taxes on your earnings, which differs based on where you live.
Basically, the larger the number of shares you buy on a stock, the less the price needs to go up for you to start making money. But how realistic is that? Could you really buy more shares in real life?
If you use more money from your paper trading account, it looks too easy to make money … Which is why you should only paper trade with the amount you have in real money.
You need to learn the basics. It’s about learning — this isn’t a game. Someday, it will be YOUR money that you’ve worked for on the line.
As a trader, mastering basic trading skills is vital, not only to your success but also your survival. Paper trading can be part of developing these skills.
To make the most of your training and paper trading efforts, you need to understand how the stock market works.
One of my goals with the Trading Challenge is to offer a real-world trading education. I have tons of resources: chat rooms, videos, DVDs, and webinars.
I’m transparent in sharing my own trades. I consider myself not just their mentor but also their fellow trader.
As my student, I want you to develop the skills and knowledge necessary to forge a long-term trading career. I want you to find the trading style that works for you.
Frequently Asked Questions About Paper Trading
What is Paper Trading?
Paper trading is virtual trading. It’s just like trading in terms of choosing a ticker, figuring out entry and exit points, and executing the trade on a platform — but without real money on the line.
Why You Should Practice Paper Trade?
Paper trading can help new traders get up to speed with the process of executing orders and navigating a trading platform. It’s also great for testing setups and strategies before you put real money on the line.
How Long Should I Paper Trade?
Paper trading is kind of like training wheels. You don’t want to get too used to them. Once you’re comfortable and profitable as a paper trader, it may be time to shift to real life trading. But remember: You may react differently when trading with real money, so take it slow and start with small positions when you go live.
What is the Best Paper Trading Site?
There are a ton of paper trading programs out there. I love the paper trading on StocksToTrade, because you can take advantage of the powerful scanning tools and charting software that make the platform so great. Full disclosure: I helped develop the STT platform, and I’m proud of it!
Paper trading can be an extremely helpful tool. It’s a great way to practice trading and gain confidence while testing different trading methods.
Once you have a good run going on the virtual platform, you can start trading small. But remember rule #1 … cut losses quickly. You’ll still experience a learning curve in the markets, but paper trading can help you shorten it.
What do you think about this post? Let me know in the comments … I love to hear from my readers!