Table of Contents
- 1 Paper Trading: What It Is & Why You Should Use It in 2020
- 1.1 What Is Paper Trading?
- 1.2 Example of Paper Trading
- 1.3 Reasons for Paper Trading
- 1.4 Paper Trade Accounts vs. Live Accounts
- 1.5 Top Paper Trading Simulators
- 1.6 How to Choose a Stock Market Simulator
- 1.7 How to Paper Trade the Right Way
- 1.8 Paper Trading: The Final Word
- 1.9 One Platform. One System. Every Tool
Paper Trading: What It Is & Why You Should Use It in 2020
Wanna gain market experience but aren’t ready to risk your hard-earned money? Paper trading is a way to develop your trading skills and gain confidence — without risking a dime…
So if you have a new trading setup you want to try, but you want to test it out first…
Or if you feel like you’ve lost your edge and need to get back into the rhythm of the market…
Paper trading can be a smart solution to build your skills. Today, we’ll take a look at what paper trading is and why you should use it in 2020.
Let’s dive in!
What Is Paper Trading?
Paper trading is simulated trading. It’s a way for anyone who wants to test out trading the opportunity to see how trades would perform in real time. It’s a virtual way to trade — and that means you don’t have to risk a cent of your capital.
You find and research stocks, set entries and stop losses, and choose order types. It’s just like trading with a live account.
But instead of entering those trades in the live market, you watch it play out virtually. You learn from your paper trades by recording all the details. You could note them in a trading journal or use a spreadsheet. But the easiest way is to use a trading platform with a paper trading feature — like StocksToTrade.
As you follow along with the trade, you make the same decisions you would if you were trading with a real account. So be prepared to decide when to close the trade, when to buy more, and so on.
And you record or note what happens to see how your trading decisions play out.
Paper trading is basically a no-risk, real-time education in the markets.
Pretty cool, right?
Example of Paper Trading
Let’s look at an example of a paper trade…
Let’s say you want to practice trading stocks in the hot coronavirus sector … But you’re nervous about risking real money. No problem! Thanks to paper trading, you can practice. Here’s one example…
On February 24, Cocrystal Pharma Inc. (NASDAQ: COCP) announced a license agreement to help develop antiviral compounds for the treatment of the coronavirus.
On that day, you see the stock jump in premarket trading. You think it might give you a chance to enter after the market open.
As you watch the chart, you see support forming around the 70-cent price mark. You think the catalyst is strong enough to boost the stock much higher if it can break the premarket high of $1.00. Check out the chart:
You enter a limit order at $1.05 for 100 shares on your paper trading module. And it’s filled as the price passes the $1.00 mark.
You exit your trade at $1.40 when you see price resistance at that level. Your trade is a success — you make 35 cents per share for a total of $35 in profit.
You were able to practice your theory without having to risk your capital. That’s how paper trading can work!
Reasons for Paper Trading
There are different reasons for traders of all skill levels to try paper trading. Here are a few key reasons…
Gain Initial Experience
When you’re an absolute beginner, you have so much to learn. Just like anything, you need to practice.
You’ll need to balance things like finding a strategy that suits you, scanning trade opportunities, entering orders, managing winning trades, cutting losses quickly … the list goes on.
Don’t expect to get all of this right when you’re just starting out. It’s unrealistic. That’s why I tell newbies to paper trade before they fund a live account.
Paper trading allows new traders to learn the ins and outs of order types and how to enter them properly. They also get screen time and experience watching the market. And they get feedback on how well they execute their strategy.
It’s a no-risk, high-upside activity. If you’re new, make sure you paper trade first.
Test New Strategies and Setups
This is a smart reason to paper trade. Maybe you have some experience under your belt, and you’ve discovered a new setup you want to try. The problem? You don’t have any stats on how you’ll perform with this strategy.
You could trade the setup risking a small amount on each trade and hope for the best … But if you wanna trade smarter, why risk capital on something that’s not proven?
In this case, many traders do a form of trading called forward-testing. They trade their normal strategy with real money, while paper trading new setups.
If you’re excited about a new setup, paper trade it for a month or more. Do it until you feel confident that the setup works for you.
Regain Your Feel for the Market
Even the most hardened, experienced traders can — and should — paper trade at times.
Every trader can go through losing periods. That can be tough on any trader. You can take a hit in your confidence and lose your feel for the market.
It can happen for a number of reasons, and it’s totally normal. You may be distracted or unable to focus. Maybe the market shifts and your setups aren’t working. Whatever it is, you feel the need to get back into the flow of the price action.
If you’re an experienced trader struggling in the current market, it’s smart to step back and paper trade for a while.
Yes, it can be hard on the ego. But think of yourself as a pro athlete taking time away from competing to work and practice and ultimately get back to the game.
Paper Trade Accounts vs. Live Accounts
The main benefit of a paper trade account is that it gives traders the ability to test different setups. You can learn how to execute trades without risking real money.
Let’s face it, the road to success in anything includes making a lot of mistakes. Paper trading allows traders to make those mistakes without hefty losses.
But there’s a drawback to paper trade accounts. These accounts aren’t real — and that can diminish traders’ needs to manage their emotions.
Don’t get me wrong … There’s real value learning different setups without worrying about blowing up your account. But emotions bring a whole new element that can affect decision-making drastically.
Emotions can cause you to enter trades you have no business being in and scare you out of trade plans that need more time to work.
Paper trading is good practice … but it’s not real. When real money is on the line, your emotions can take hold — fast. And eventually, you gotta take off the training wheels and practice your setups with the reality of potential losses.
Another obvious difference is that you can’t grow your capital when you only trade with a paper trading account.
Top Paper Trading Simulators
Not all platforms offer a paper trading feature but here’s a list of the top simulators in 2020…
Yep, I’m biased. I really do believe StocksToTrade is the best paper trading platform out there.
First, it was created by real traders for traders. We worked our butts off to create a user-friendly design.
The analytical tools work in tandem with the paper-trading program. They use real-time data to make it as realistic as possible and help you prepare for live trading.
One common complaint with paper trading is that all trades get filled. That’s not what happens in the real world. If there are no sellers in the real market, your buy won’t get filled.
Don’t worry, in StocksToTrade you can customize your paper trading account for delays in execution or PDT restrictions to mimic real-world challenges.
You can also change the commissions setting to try different fee structures and simulate trading with different brokers.
TradingView is a charting and analysis platform that can be easy and intuitive for beginners to use. It can also be powerful enough for advanced traders.
Because it’s web-based, the platform is super light. It has a paper trading module so you can learn before you risk real money.
When you’re ready to trade with a live account, you can connect your TradingView account to supported brokers.
TD Ameritrade is a large online brokerage that offers a variety of resources and tools to its members.
Its downloadable trading platform, thinkorswim, is pretty robust and allows users to paper trade the market.
E-Trade is another well-known online brokerage that offers a number of resources and tools.
Its Power E-Trade platform allows members to practice trading stocks, options, and more without committing real money.
Webull is a U.S.-based discount broker…
Because it’s a newer company, it only covers U.S. stocks and ETFs. It’s limited in resources and support compared to other companies on this list. But it does offer paper trading through its platform.
Tradestation is considered a trading technology leader and attracts casual to seasoned traders.
Its desktop-based platform Tradestation 10 is robust and includes a simulated trading mode.
The downside of TradeStation is that you can’t access the platform unless you have an account. And with this broker, there’s an account minimum to do that.
How to Choose a Stock Market Simulator
Like I said, not all platforms offer a paper trading feature. So it’s not like there’s a huge pool to choose from.
And not all platforms are equal. Some may be faster or more customizable.
You want to pick one that can bring you as close to the real-world experience as possible. That way, you don’t get caught off guard when you go live.
How to Paper Trade the Right Way
Do you see the value in paper trading? Good. Now let’s look at how to do it correctly, so you can get the most benefit from it.
To paper trade, you need a way to record all of the details of the trade.
As mentioned earlier, if you want to keep it basic, you could write everything down in a notebook. Using a spreadsheet is even better. But if you really want to get the best experience, we recommend you use a trading platform with a paper trading feature, like StocksToTrade.
There’s no point in fudging data. So don’t record that you would’ve kept a big winning trade if you’d likely close the trade early on a live account. This will only give you incorrect feedback on how your trading will perform in the real world.
The main idea with paper trading is to try and simulate exactly what you would do with real money at stake. So follow your trading strategy to as close as you can. And be sure to record all losses, commissions, and costs.
Analyze Your Performance
After you gain some experience, you’ll have a better idea of how your strategy should work. At this point, you’ll probably want to work on refining.
This could mean examining losing trades and looking for ways to cut losses. Or it could mean looking big winning trades and how to find consistency. There are many ways to analyze and improve your trading. Make sure you’re thorough. Look at all the angles and run all the numbers.
Downgrade Your Expectations
Maybe you see some blistering performance on your paper trading account … It’s fantastic that you’ve found something that seems to work. Remember to keep it real. Almost every trader performs worse in live market trading.
I’ve already mentioned that there are many psychological forces at play when you have to perform with real money.
A good rule of thumb is to halve your performance expectations. So expect to make half the amount of profits. This provides a buffer to protect you against the disappointment that could come after you go live.
If all things go well, your strategy shows solid potential and you feel confident in your abilities. It’s time to consider trading with real money.
Many traders find it’s a good idea to start out risking small amounts of capital and slowly increase in size.
After you get some live experience under your belt, compare your performance with how you did when paper trading the strategy. If there’s a massive difference, it could mean that you’re not executing correctly. Or maybe you weren’t realistic when paper trading. It’s also possible that the markets changed.
Whatever happens, if you ever lose trading confidence, never hesitate to go back and paper trade for a while.
Paper Trading: The Final Word
By this point, you can probably see how paper trading can be beneficial to developing your trading skills. But we hope you realize how important it is to keep your goals realistic and also maintain a trading journal.
Here are just a few things you should track:
- Would the trade hit stop-loss?
- Would you have gotten filled at your limit order?
- Would you have seen the setup in time?
It’s a lot of work! Thankfully, with StocksToTrade you can help with our state-of-the-art paper trading feature.
You enter your trades into the platform just as you would when trading a live account. You won’t have to constantly check your stop-losses or fills. The StocksToTrade software does it all for you and provides you with feedback on how your trades work out.
The STT paper-trading feature can save you hours each day. That gives you more time to focus on finding the best setups. Sign up for a 14-day trial for just $7 today to start today!
Ready to take a big leap with your trading education?
With StocksToTrade Pro, you get daily market webinars with me, Tim Bohen, as your lead trainer. You can hear what I think about what’s happening in the markets and watch as I build my watchlists and map out the trading day. I also stream the market close to help you start building a trading plan for the next day.
You can also gain insight from other traders in the exclusive StocksToTrade chat room and learn cutting-edge trading tactics in the weekly strategy webinars.
If you’re serious about becoming a top trader, don’t sit alone recording paper trades in a notebook. When you go it alone, you risk making small-but-critical mistakes.
Join StocksToTrade Pro and be part of an elite community. We’re all about trading smarter, sharing knowledge, and using the best tools to take on the stock market. Join us at StocksToTrade Pro today!
Do you paper trade? How long do you usually practice before going live? Tell us below!