Paper Trading: What is it and how to get Started?

Paper trading is a way to practice trading in the financial markets without risking any real money. It’s like a simulation where you can place stock market orders and try out different trading strategies without the stress or risk of losing actual funds.

The term “paper trading” comes from the old days when investors would write down stock prices and potential trades on paper before making any real decisions. Today, with online trading platforms, paper trading has become much easier and more practical—no need for paper and pen!

If you’re interested in learning more, keep reading to learn what paper trading is all about and how to use it to improve your trading skills.

WARNING

Trading exposes you to the risk of losing more than your initial investment and incurring financial liability. Trading is suitable only for well-informed, sophisticated clients able to understand how the products being traded work and having the financial ability to bear the aforementioned risk.

Transactions involving foreign exchange instruments (FOREX) and contracts for difference (CFD) are highly speculative and extremely complex. As such, they are subject to a high level of risk due to leverage. Please keep in mind that CFD trading is banned in the US.

Information published on the NewTrading.io website is for informational purposes only and should not be construed as offering investment advice or as an enticement to trade financial instruments.

How to start paper trading?

1. Choose the right platform

The players that offer paper trading break down into two major types: online brokers and trading simulators. 

For beginners, unaffiliated trading simulators are often the better choice because they provide a neutral environment focused solely on learning.

In contrast, online brokers may offer “demo accounts” with the underlying intention of promoting their services.

These accounts are primarily used as a marketing tool to encourage users to transition to real-money trading, which can sometimes create pressure to move forward before you’re fully prepared.

When choosing a trading simulator, it’s important to consider the following factors to ensure you get the most out of your practice:

1. No pressure to switch to live trading
   Unlimited free access without hidden costs allows you to practice at your own pace, removing the financial pressure to move to live trading prematurely.
2. Realistic portfolio management
   The ability to reset your balance and configure a portfolio that mimics real-world conditions is crucial for gaining meaningful practice and experience.
3. Reliability and accurate data
   A platform that provides smooth operation, stability, and up-to-date stock market data ensures you can trade without interruptions and make informed decisions.
4. Performance tracking
   Detailed tracking of your trades is vital for analyzing your performance and refining your strategies over time.
5. User-friendliness
   An easy-to-use interface enhances your experience by allowing you to focus on trading rather than navigating a complicated platform, though this should not come at the cost of reliability.
6. Learning resources
   Access to educational content, such as tutorials and webinars, supports your growth as a trader, providing valuable insights and knowledge.
7. Multi-device compatibility
   The ability to use the simulator across multiple devices, such as desktops, tablets, and smartphones, allows for more flexible practice opportunities.
   

We’ve reviewed the leading options in the market, and for beginners, our top recommendation is the ProRealTime Web Paper Trading platform. Check out the video below to learn how to set up your paper trading account and start practicing today.

2. Set up your paper trading account

Set up your account with a realistic starting balance and simulated trading expenses. Keeping things close to real life is important because it helps you develop habits and strategies that will work when real money is on the line. Using realistic leverage and trading hours prepares you for the actual risks and conditions of the market, making your practice sessions more meaningful.

Your first trading session should be dedicated to familiarizing yourself and getting comfortable with the simulator.

During this first session, press every button, pull every lever, and flip every switch. 

Ask yourself “What does this do?” about everything you see. Explore each nook and cranny and place every kind of stock order you can think of before resetting your balance. You’re trying to get all your mistakes out at the beginning so they won’t come back to bite you in future practice sessions.

3. Develop a trading plan

The biggest risk of paper trading is becoming a compulsive trader, but if the money isn’t real, why not do it all just for an extra dose of fun?

There’s no harm in going all out with a paper trading account, but just be careful not to fall into bad habits. Playing at “casino trading” will not help you become a better trader, and it could cost you dearly when you transition into real trading.

Paper trading should be a time to learn good habits and develop your trading skills. And nothing will help you more in building those things than keeping a detailed trading journal. 

Put your whole plan in writing: strategic vision, objectives, trading rules, etc. Formalize your trading plan as you reflect on your paper trading experience and look to apply the trading lessons you’ve learned during that time.

4. Take a step back and carefully scrutinize your performance

Is your paper trading account in the black? Are your profits soaring? Don’t let it go to your head! You need to consider several things to keep your performance in perspective.

Beyond the additional difficulties inherent in real trading, particularly increased stress, psychological bias, and emotional burden remember that your trading environment is probably not entirely realistic.

Have all fees and expenses been applied against your return? Are the execution levels of your stock market orders realistic compared to the actual order book? Has the applicable investment tax been taken into account?

Finally, even if you’ve enjoyed a winning performance, you still must overcome one final series of obstacles to confirm your ability to beat the market.

5. Explore the backtesting features

When it comes to paper trading, going back in time is indeed possible! 

Backtesting allows you to test a trading strategy on historical data, analyze its behavior, and measure its performance.

Since a paper trading account is not confined to the present, you can practice on an almost unlimited number of scenarios and market situations, testing your strategies against past events like historical crises, speculative bubbles, and range phases.

Just beware: No matter how successful your backtesting goes, past performance does not guarantee future results. Applying a successful trading strategy in a specific situation in the past could still backfire and expose you to vulnerabilities arising from even the slightest change in market conditions.

After analyzing your paper trading performance, adjust your strategies based on your findings. 

Remember, paper trading is a learning process, so don’t be afraid to make mistakes and experiment with different approaches.

Steps to adjust your strategies:

1. Identify shortcomings: Figure out areas where you struggled or made errors. Look closely at your trading journal to determine any patterns.
2. Learn from your mistakes: Try to understand the reasons behind each mistake, and then use this knowledge to fine-tune your trading methods.
3. Incorporate improvements: Implement improvements into your trading plan based on your analysis and new knowledge.
4. Test your adjustments: Before committing real funds, continue to paper trade and evaluate the adjustments you’re making.

By focusing on analyzing your performance and adjusting your strategies, you’ll find yourself better equipped and more confident when it comes time to tackle real-world trading.

Paper trading vs real trading: How are they different?

Real trading involves making real financial transactions with real money, exposing you to potential losses. Conversely, you’re not using real money when you’re paper trading, so any losses are only hypothetical.

Traders usually trade “on paper” before they begin trading for real. 

But practicing on a free trading simulator—no matter how realistic—also has a significant limitation: You’re not using real money. So, you won’t truly experience the pressure, or exact same psychological biases, and emotions that factor into actual trading.

If you plan on opening a real trading account later, it’s better to do it gradually, starting with spot trading (trading without leverage).

Paper Trading	Live Trading
Risk-free, simulated	Real financial risk
Strategy testing, learning	Actual trading with potential gains/losses
No financial loss, educational	Real market experience
Lacks emotional realism	Financial risk, emotional stress
Beginners, strategy refinement	Experienced traders, real investment

FAQ

How can beginners get started with paper trading?

Before you begin, make sure you understand the basics of the stock market and trading strategies. Once you’re ready, you can create a hypothetical portfolio without investing actual money. Many online brokers and trading platforms offer paper trading options that simulate real trading for beginners. Set up a virtual account and track and record your trades to gain experience.

Do paper trading results reflect what would happen in real trading?

Paper trading provides a valuable simulation of real trading, but it’s crucial to remember that no simulation is perfect. While it can offer insights into your trading skills, paper trading results might not always accurately reflect real-life trading outcomes, because your emotions and reactions to changing market conditions can play a significant role in actual trading. While paper trading is an excellent way to learn and practice, it’s always important to approach real trading cautiously and be mindful of the potential differences.