What is paper trading?
The various trading markets constantly attract new traders, some of them stay for a few years and others are looking to make a short term trade with large benefits and then stop trading. Common to all new traders is some understandable hesitation mixed with concerns to lose money. While any type of trading has its risks, brokers offer a variety of tools to help first time traders to master their skills and methods. One of them is called “paper trading”, although you are less likely to hear the term. It is another term for what is known to online traders as a Demo accounts.
Demo accounts are vastly used by first time traders who wish to practise and learn how to trade before they trade with real money. Other users are more experienced traders, that in order to test new strategies or open new trading channels practise them first by opening demo accounts. This way they could learn about the market, and most importantly – learn about themselves as traders. Needless to say, this is a very useful tool in the trading world. The term ‘paper trading’ comes from the stock exchange market, where investors who wished to practise would write their investments on paper and follow the market movements.
Using a demo account allows first time traders to experience and trade with an account that looks and acts similarly to the real online trading accounts traders use. Demo account users receive an amount of virtual money in the beginning, and can start trading by opening selling and buying positions. Just like a real account, the demo account shows market movements on the traders’ screens, so they can decide if they should continue their trade or get out. At the end of the day they can assess their actions, learn from them and get ready to start trading in their real account.
For demo account users it is not only to important to practise on demo accounts, but also look back at their actions and learn from them. It is important to do so before trading with a real account. This is also important for more experienced traders, who want to practise on demo for any reason. They need to check if their attempted trades are as beneficial as they'd hope at the end of the day.
With all that being said, some demo accounts do not use exactly up-to-date information but delay it by 15-20 minutes, so the data won’t be used by competitors. Others display fake data, but the main goal remains the same – get traders ready for the Forex market. On the AvaTrader demo account the information displayed is in real-time and projects the accurate rates. This tool is very common and used worldwide by brokers on all types of markets – Forex, stocks, bonds, commodities etc. Due to the fact there is not real money that’s been put in, it’s often called “Paper money”, “Monopoly money” and more.
Advantages and disadvantages of paper trading
However, there are some risks to paper trading, and one should not ignore them. Some people would advise not to begin with a demo account for a number of reasons. The main one, according to them, is the sense of euphoria paper trading can give. Since there is no real money being used, traders may take risks that they otherwise wouldn’t, thus expanding their profits. A case of money loss, on the other hand, is often not taken very seriously since, as said, it’s not real money that was lost. There is another disadvantage; since it’s not their money they are trading with, they will not always follow the market and respond on the spot as they would in the case of real money.
Should we use paper trading?
At the end of the day, should first-time traders use paper trading? Should they open a demo account before trading in the real market?
The answer is yes, as long as they remember how to work with it properly. A few simple guidelines would dramatically increase the effectiveness of a demo account. The first one is to treat it as a proper real account, with real money being traded. This will not only overcome the main obstacle of demo accounts, but will ease the transition from demo account to real accounts, since the actions they will take will be exactly the same.
Paper trading might seem easy, since there is an important part missing. Real trading involves a lot of emotions, which can be a plus since trades are more involved and invested on the market, but can lead to negative consequences – emotional trading, with no real thought or research and ending with money loss. This is usually not part of trading with demo accounts due to its nature, and as long as this difference is remembered and taken into account, the transition from demo to real will be more successful.
Another important tip is to learn as much as possible. It is highly recommended to practise on the demo account, while reading articles and educational blogs regarding the market you wish to trade. Once the trading platform is understood, with some time and practise, you will be better prepared for the real market. However, practicing for just a few hours is not sufficient, and might give that dangerous feeling of euphoria that was mentioned before. Knowing how to operate the platform does not guarantee understanding the market, from the large-scale view to its small nuances. We recommend using the demo account for a couple of days, while simultaneously reading relevant materials, and then start trading while it is all fresh.
Finally, trading does not suit everyone. Many times people rush to trade, just to end it with bitter disappointment, not to mention the loss of a substantial amount of money. It is highly recommended to open a demo account to practise first, and to use paper trading as a mirror to one self and to be able to answer the following questions – am I ready to trade? Is this market suitable for me? If the answers are yes, it is time to open a real account!
Click here to open a demo account and master your trading skills!