I did use paper trading in the initial stages of my trading journey.
Even now, once in a while, when I am testing any new strategy (especially Option Selling Strategies), I paper trade it for a few weeks to find out its shortcomings of the same.
Let's understand if paper trading can help us to improve trading performance.
If you are a complete beginner and need to learn about paper trading, you will be gaining full practical knowledge by the end of this newsletter.
Let's Get Started!
Paper trading is a method for practicing trading and testing strategies in a simulated virtual environment.
Primarily intended for educational purposes, the key distinction between paper trading and real trading is that - real money is not involved; it's just the demo money you can use to take trades in the real market.
By analyzing the performance of your simulated trades & strategies, you can assess the accuracy of their strategies/predictions.
This method is beneficial for beginners who can learn how to buy and sell stocks, as well as experienced traders who can evaluate the profitability of new strategies.
Popular Paper Trading Sites / Apps in India:
Given its benefits, several online brokers and websites provide their clients with paper trading accounts. The following list highlights some of the top paper trading apps and websites available in India:
Trading View (Free, Suitable for Stocks) https://in.tradingview.com/
- Create your trading view account and open any stock chart.
- At the bottom, you can find the " Trading Panel" option - Click that and select Paper Trading by Trading view.
- Once connected to Paper Trading, you can find settings to change the capital amount and even add approximate commission percentage so that your P&L will reflect the values after brokerage.
- You can go to the settings in the top right corner and enable Buy / Sell buttons to get the buy/sell buttons on the chart directly.
- Alternatively, right-click on any chart to see the "Trade" option and place trades directly.
NeoStox (Paid - Suitable for Equity, Options, and Futures)
https://www.neostox.com/paper-trading-subscriptions
Almost all the important features are available on this website; you can explore the pricing & all other features here.
You can also check out a few of the below Demo Trading Platforms
MoneyBhai by Money Control https://moneybhai.moneycontrol.com/
Sensibull Virtual Trading https://sensibull.com/ - I prefer testing Option Selling Strategies.
Zerodha https://kite-demo.zerodha.com/positions
Does paper trading help?
Let's understand some Advantages & Disadvantages.
Advantages of Paper Trading:
Now that you understand the concept and mechanics of paper trading let's dive into the benefits it provides to traders
There is no monetary loss since paper trading involves virtual money.
This allows traders to learn and trade relaxed without fearing capital loss arising from emotional & technical mistakes.
The absence of risk minimises stress, enabling you to practice and learn at your own pace without fear.
Emotional reactions like greed and fear, which can badly affect risk management, are avoided in paper trading.
Paper trading enables the identification of flaws and mistakes in strategic and analytical processes.
Traders can gain experience using the paper trading option at every step of the trading process.
Paper trading helps you to build confidence in your trading abilities by allowing you to track their hypothetical profits and losses.
It provides an opportunity to gain experience and learn from mistakes without the emotional impact of real money at stake.
Wait, don't get too excited:
There are some Disadvantages to the Paper Trading
- Lack of Real-Money Emotions:
One of the main drawbacks of paper trading is that it does not involve real money, which can result in a different psychological experience than actual trading.
Without the fear of losing real money, you may take higher risks or make decisions they wouldn't if real money were at stake.
The absence of real emotions like fear and greed can impact decision-making and affect the development of proper risk management skills.
- Overconfidence and Self Satisfaction:
Paper trading can create false confidence in traders, especially if they achieve consistently positive results in the simulated environment.
This overconfidence may lead to taking excessive risks or deviating from a well-defined trading plan when transitioning to real trading.
Additionally, prolonged paper trading without experiencing real losses can lead to self-satisfaction and a lack of preparedness for handling the emotional and financial challenges of actual trading.
- Limited Impact of Trading Costs:
Paper trading often does not consider the impact of trading costs, such as commissions, spreads, and fees.
These costs can significantly affect profitability in real trading scenarios. With factoring in trading costs, the performance results obtained in paper trading may accurately reflect the actual net returns achievable in live trading.
How it can Impact Trading Psychology:
Emotions & Psychology play a significant role in trading, and paper trading may not adequately prepare traders for handling the emotional ups and downs of real trading.
The fear of losing real money, the pressure of making split-second decisions, and the psychological impact of wins and losses are only experienced in live trading.
Real-time analysis, quick decision-making, and adapting to changing market conditions are essential skills that may not be fully developed through paper trading alone.
Conclusion:
While paper trading can be useful for learning the basics of trading, developing strategies, and gaining familiarity with trading platforms, it is important to recognise its limitations.
Traders should gradually transition from paper to live trade, acknowledging the differences and challenges of real-market conditions.
Combining paper trading with studying market analysis, risk management techniques, and trading psychology can help traders better prepare for the complexities of real trading.
Final Key Point:
Also, in virtual trading, you can have any amount of capital, but it's essential only to take a certain amount of capital you plan to deploy in the real markets once you get started with real money.
Otherwise, you will end up making risk management & position size mistakes.
This newsletter helped you to get a good understanding of how Paper Trading works and how you can make the best use of the same.
That's it for this week; enjoy the weekend.
Keep Trading Mindfully
~ Arun Bau