Have you ever played a game of poker with just chips and no money on the line? In those games players bluff, they call hands they know they have no chance at winning, and will ultimately play in a manner that displays one huge underlining problem: they don’t care because it’s not real money. Well, that’s paper trading in a nut shell.
Paper trading is usually recommended as a training prerequisite before investing/trading in the stock market. It works by pretending you own X amount of shares of Y stock that you selected and tracking your results in a set period of time to simulate being in the stock market. Paper trading is simply a waste of time though and I wouldn’t recommend anyone bother with it.
Yes, paper trading has its benefits for the extreme beginner, but it’s ability to teach you how to invest or trade is incredibly limited. Paper trading will give you a basic idea of how the stock market functions, but beyond that it just doesn’t make much sense to bother doing it. Simply put, there are much better ways to prepare you for the stock market than paper trading. Here’s why:
Builds false confidence
Let us suppose you had a rather lucrative paper trading experience. You feel good about yourself and think you’re ready to invest or trade the stock market. You open your brokerage account, and find out after a few bad trades (which are inevitable) that the only thing you know is that you know nothing. This is because paper trading is so one dimensional compared to the real thing that you don’t get much of an education.
Fails to Simulate the Stock Market
The problem here is that you just can’t simulate the stock market, or what it feels like to be in the stock market. The variables that influence the stock market are practically limitless that I find myself unable to truly explain the depth of this issue. Economic forecasts, hedge fund influences, media headlines, market confidence, etc.; Paper trading just can’t capture all of those little things that compose the stock market, and without that you aren’t getting a real simulation.
Lacks Market Psychology Lessons
This is a huge issue as well. Regardless of whether you are a trader or an investor, being successful in the stock market is largely dependant on how well you can control your emotions. If you remember only one thing from this article let it be that paper trading will completely mislead you in terms of how it feels to have your money on the line. There is no substitute for learning how to discipline your emotions than to battle it out in the real stock market.
Wastes time that could be used for real learning
If you want to prepare yourself so you can get into the stock market, buy some credible investing books and read them front to back, check out my beginner articles, and subscribe to a credible financial media newsletter/paper. It will definitely be more time consuming than paper trading will be, but what you will learn will be so much more in depth than what paper trading has to offer.
While I can relate to some sentiment expressed in this article, overall I disagree with it. I think paper trading perhaps was a waist of time due to the absence of good technology to support it. I knew many traders who would resort to paper trading after hitting a string of loosing trades. They would do it for a few days but quickly return to real money trading. Nobody did it long enough, because there were no good tools, all they did is to input pretend trades into excel. I don’t care how gigy you are – it is a boring exercise – no wonder they would quit after few days of paper trading. However with the use of proper tools, for example the one provided by VivaTrader.com, and by doing it long time, I am talking about months, I believe you can make a paper trading a valuable learning experience, and avoid unnecessary losses. The alternative would be, as you may hear some times, to “trade small”, but how small can you get? The value of one S&P 500 emini contract if $50,000 and a value of a full contract is $250,000: you cannot buy less then one contract!! And if you are a forex trader you can only trade in currency blocks of 100K, is that small enough? Not for the most people. I would really suggest checking out this VivaTrader site. They provide full brokerage simulation including margin accounts, monthly statements, P&L reports and etc. That is how it should be to make paper trading not to be waist of time.
Paper trading can be a great help, especially for novice traders. Here they can grasp the idea on how day trading really works. True that the actual trading is different compared to paper trading. But here you can try out various strategies to know which works best in their style of day trading.
In the event that an individual would like to make money through investing , you should always be certain to get plenty of investor information and facts prior to you making any purchase or financial commitment. Many people are generally extremely successful at investing, but there are also many who fail with their first attempt simply because they didn’t seek out the appropriate investor information before they dove in.
Paper trading is probably not suitable for day-trading. But, its pretty good for short-term to long-term trading strategy. Instead of jumping directly to the real market and losing money, it is nice to learn the basics with paper trading.