New to Trading? Here Is Everything You Need to Know About Paper Trading and How It Helps?

Starting as a new trader is very overwhelming. Trading is a high-risk street, and without the proper knowledge and experience, it is close to impossible to make money.

Trading is not impulse-driven. There is a science behind the process, and without fully understanding them, it could lead to large-scale losses.

As you start trading, you will come across many doubts. For example, what is a DEMAT account? What is a dividend? What is a wash sale? All of this jargon will sound alien at first but will start to make sense over time.

The only definite way to master any new skill is with practice. But before that, it’s essential to understand the need for this practice in stock-trading.

Understanding Trading

Trading is like a simple game of monopoly. Except instead of buying cites, you buy stocks and securities.

A trader aims to purchase stock at a low price and then sell them back to the market at a higher cost. This difference in the price will be the profit to the trader.

Just like the game of monopoly, the more money you have, the better the quality of the trade. For example, if you buy ten stocks at the cost X and the share goes up in price to 2X, the final profit you will bank will be 10-time-2X. Thus having more funds will give you a better yield.

But this also adds the risk factor. If the price drops to x/2, you incur a loss on all the shares. This uncertainty is where experience in trading comes to your rescue.

But how does one gain experience without actually spending money? The answer is mock-trading.

These are ways to prepare you for the real market. You assume a small amount as capital (similar to what you would invest in the real market), and then run unofficial tests on stocks. Over time you will lose and make money, but they will both be imagery.

The more widely used format of this mock-practice is called paper trading.

What Is Paper Trading?

Paper trading is a simulated trade, that the user would do on paper, to practice an action, predict an investment, or learn the craft better. The term paper-trading has been around from a time when online trading platforms did not exist. It is the practice of playing with the live market, but without actual money.

You will understand the risks of buy/sell, understand market jargon, learn to manage a portfolio, and learn the basis of profit and loss management. This exercise can also help a seasoned trader understand new trends or chart future investments.

Benefits Of Paper Trading.

Keep in mind that paper trading is not a real-trade but a simulation. The benefits of this learning are:

1. Zero Risk:

Before you dive into the market and blow your hard-earned money to learn basic techniques, you would instead practice paper trades. You lose zero money and pay zero signup-fees to the brokers.

2. Learn By Doing.

Learning to swim from your home with the help of an online video seems impractical. You will never learn to swim until you are in the waters. In the same way, trading cannot be merely a practical lesson. With a few months’ experience in paper-trades, you understand the intricacies of the market.

3. Experiment With Strategies.

Trading has many strategies like day-trading, swing trading, scalping, and long-term trading. All of these take many years to master. It is very impractical to spend time and money to find the trading style that suits you. Paper tradings give you the flexibility to try each method and master them, giving you a headstart.

How To Do Paper Trading?

There are two ways to do paper trading. Each of these has its apparent pros and cons.

Conventional Method.

Paper trading can be done, as the name suggests, on paper (or a computer document). You create a virtual market-watch and then study stocks for a few weeks. Allocate yourself a budget and only buy and sell within that budget. Write down the buy price, the selling price, and the stop-loss.

Be honest with the change in costs and understand if you made the right decision. Use this time to study charts, quotes, and read the news to enhance your trading-methods.

Online Simulations:

The internet has also enabled us to practice this craft with the help of a best paper trading app. These are applications that provide you a virtual dashboard with virtual currency. The stock value and charts are authentic and linked to the real-time market.

Using this platform is a recommended alternative. It will give you a hands-on understanding of e-trading platforms.

You will also be able to see real-life trade executions. The experience is definitely more wholesome and provides a superior level of confidence to move to a live trading platform.

Essential Tips For New Traders.

If you want to procure the maximum benefits of paper-trading, Here are a few tips to keep in mind.

Firstly, do not assign yourself an extensive or unrealistic capital. Gauge how much you would invest if you were to play the real market. By assigning yourself a very high amount, you would always live under the illusion of a profit, which is counterproductive to this exercise.

Additionally, be honest with your trades. Do not write-off the action because it made a loss.

You cannot do that in the real world. To enforce better discipline, use an application and not the conventional way. Find a platform that you find easy to use.

Lastly, paper trading does not account for costs like fees and commissions. You will only account for these on a real platform.

If you see results in the first few days, do not go overboard and move the live market. Practice for at least a few months.

In Conclusion,

When you finally start trading in the live market, you could try to replicate your strategies from the paper-trade. Put your practice to good use. Keep in mind to purchase in small increments until you find the ease and confidence to play bigger.