Paper trading is a technique which is often recommended to new traders. It is considered to be a beginner’s entry tool to the world of stock market trading. But is it the best way to start your stock trading journey? Should new traders start with paper trading?
What is paper trading?
First let’s understand the meaning of paper trading. Paper trading is the act of trading without actually trading in the stock market. It is a method in which a trader writes down his/her trades on a piece of paper & calculates the outcome without actually taking any real trades. Paper trading can be done on a piece of paper or excel sheet or any other tool which can be used to record the trades. An example of paper trading looks like this.
In this example, a trader records his/her trades as if they were real. Since these trades are not actually performed on a trading account, the trader doesn’t make/lose any money. Such a technique of recording your trades without actually doing them is called paper trading.
Advantages of paper trading
There are some advantages of paper trading over real trading.
1. No risk involved
The biggest advantage which paper trading has over real trading is that there is absolutely no risk involved. There are no constraints of capital when paper trading, so a trader can practice with as much profit and loss as they want. It allows traders to reset their trading if they figure out some mistakes which they have been making while trading. Also, there is no chance of blowing up your trading account which can send you out of the trading game forever.
2. No emotions are involved
Since there is no risk to the trading capital, there are no emotions involved while paper trading. If you continuously have 5 stop-losses in a row, then you won’t really feel any pain because there was no actual money on the line. All the trades were fictional and performed only for practice.
3. It can be used to develop a new strategy
Lack of risk and emotions allow a trader to test a new strategy which might not be ready for the actual stock market trading. There is no point in losing out a big chunk of your trading capital when trying to develop a new trading strategy. Instead, a trader can simply paper trade while recording all of his/her trades religiously which can allow the trader to figure out the strengths and weaknesses of his/her trading strategy.
Why should paper trading never be used by new traders?
Even though paper trading seems like an amazing idea in theory, it is almost always a waste of time in practice! Most beginners make the mistake of placing high emphasis on their trading strategy. However, controlling emotions and risk management constitute over 80% of a trader’s skill! Since paper trading removes the most important elements of trading (the risk of loss & how to manage it – financially and emotionally), this makes paper trading essentially useless. Even if you hit 10 Stop-losses in a row while paper trading, does it really matter? There was no money on the line anyways!
You cannot learn trading without actually taking real trades. The control of emotions, self-discipline and risk management form an essential part of a trader’s arsenal. Even though most new traders focus on finding the “best” trading strategy, it plays only a minor role in making a trader profitable!
You can never learn swimming without entering the pool. Similarly, you can never learn trading without entering the markets!
What should new traders do instead of paper trading?
New traders should always start with actual trading instead of paper trading. Since a newcomer has low capital and a low risk appetite, they should always focus on smaller quantities while trading. If you are a beginner who is starting his/her trading journey in the stock market with a small trading capital (say Rs. 10,000), you should only take a risk of Rs. 100 (1% of your trading capital) per trade. To learn more why risk should be limited to 1% of trading capital, visit this article – What is a good win rate for profitable traders?
As a beginner, even if you take a risk of Rs. 100 per trade during the learning phase, it allows you to get the actual feeling of trading in the live market. You will learn the most important skills in trading – controlling emotions & risk management (which you cannot learn in paper trading). The new trader can always increase their trading capital to make profits in the stock market once they complete their learning in the market.
Always remember, the stock market is the best teacher and guide to learn about the stock market. Start small and become comfortable with stock trading, then the focus should be on increasing the trading capital & earning big profits! To learn more about a professional trading system which new trader’s should use to improve their trading skills, visit this article!
Conclusion
Paper trading is a technique which many new traders use to improve their trading skills. Even though it appears to be a perfect solution for a beginner to trade without risking any money, it is essentially useless because it lacks the key components in trading – risk management & emotional control. New traders should always start with a small capital & work their way toward a bigger capital to earn big profits! However, the final decision of the usage of paper trading depends entirely upon the reader.
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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