Are you looking to get experience in the markets, but you don’t yet feel ready to risk your hard-earned capital?
Perhaps you have a new trading strategy that you want to try out, but you’re worried it might not be profitable?
Or maybe you’re an experienced trader who’s simply lost the ‘winning touch’ and you need a way to get back into the swing of the market?
If any of these scenarios sound something like you, then learning to paper trade could be the solution you’re looking for right now.
Let’s take a look at what paper trading is and how to do it properly …
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Table of Contents
What is Paper Trading?
Paper trading is simulated trading, to give you the opportunity to watch the markets and see how your trades would theoretically perform in real time, without having to risk a cent of your capital.
You select trades, the entry price, the stop loss, the order types, just the same as you would when trading a live account.
Instead of entering those trades into the live market, you record all the details. You could note them in a trading journal, use a spreadsheet, or use a trading platform with a paper trading feature.
Then you follow along, making the same decisions you would if you were trading a live account: when to close the trade, when to buy more, etc.
Whatever happens, you record what happens to see how profitable your trading decisions would’ve been.
Paper trading is basically a zero cost, real-time education in the markets.
Pretty cool, huh?
Reasons for Paper Trading
Maybe you’ve heard that newbie traders should paper trade before they ever risk real money, right? That’s true, but there are reasons for traders of all skill levels to paper trade at times as well.
Here are a few of the main reasons for paper trading …
To Get Initial Experience
When you’re an absolute beginner it’s very likely you won’t be a profitable trader from the get-go. Just like anything, you need practice.
You’ll need to balance things like finding good trades, entering orders correctly, managing your winning trades correctly, cutting your losses when you have to … the list goes on.
To expect to do all of this perfectly when you’re just starting out is unrealistic. That’s why everyone tells newbies to paper trade before they even fund a live account.
Paper trading allows new traders to learn the ins and outs of order types and how to enter them properly, gives them screen-time watching the markets, and provides feedback on how profitable they could be if they executed their strategy with real money.
It’s a no-risk, high upside activity. If you’re new, make sure you paper trade first!
To Test New Strategies and Setups
Perhaps you have some experience under your belt, and you’ve discovered a new setup that looks good, but you don’t have any statistics on how it will perform.
You could just trade the setup with a small amount of risk on each trade and hope for the best. But, if you want to be a smart trader, why risk capital on something that’s not yet proven?
In this case, many traders do a form of trading called forward-testing. They may trade their normal strategy with real money, but on the side, paper trade their new setups.
If you’re excited about a new setup, paper trade it for a month or more — or at least until you feel confident that the setup works for you and turns a profit.
To Regain Your Feel for the Market
Even the most hardened, experienced traders can — and should — paper trade at times.
It’s no secret that every trader, no matter how good they are, goes through losing periods where they lose their feel for the market.
It may be because they’re distracted and unable to focus, or it could be that the market is acting a different way and they need to get back into the flow of the price action.
If you’re an experienced trader who’s struggling in the current market, don’t feel ashamed to step back and do some paper trading for a while.
Sure, it may be hard on the ego — but just think of yourself as Tiger Woods putting in work at the driving range, preparing to get back and compete on the golf course.
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 and — hopefully — start turning it into profits as quickly as possible.
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 very basic, you could just 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 Pro.
- Be as realistic as possible. It’s no use recording that you would’ve kept a big winning trade if you would’ve most likely closed the trade early on a live account. Doing something like this will 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 to 100% as you can and make sure to record all losses, commissions, and costs.
- Analyze your performance. After you’ve had at least a few weeks and many trades under your belt, you’ll have a good idea of how you could expect your strategy to work. At this point, you’ll probably want to work on refining your trading strategy to make it perform better. This could mean examining the losing trades and looking for ways to skip them, or at least lose less. Or, it could mean looking at the characteristics of the big winning trades and looking for ways to find more of them or hold on them longer. There are many ways to analyze and improve your trading, but just make sure you do it very scientifically — look at all the angles and run all the numbers.
- Downgrade your expectations. Perhaps you’ve seen some blistering performance on your paper trading account? It’s fantastic that you’ve found something that seems to work, but realistically, almost every trader performs worse in live market trading.
The reason for this is that there are many psychological forces at play when you have to perform with real money in a live trading environment.
A good rule of thumb is to halve your performance expectations: 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.
- Go live. If all things have gone well, your strategy has shown it’s likely profitable, and you’re feeling confident in your abilities, you can now consider trading it with real money.
Many traders find it’s a good idea to start out risking small amounts of capital, increasing size as they make more profits.
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, you weren’t realistic when paper trading, or the markets have simply changed their patterns.
Whatever happens, if you ever lose confidence in your abilities or your strategies, never hesitate to go back and paper trade for a while.
What Do We Recommend Next?
By this point, you can probably see how paper trading is beneficial to developing your trading abilities and becoming as profitable as you can be — but we hope you realize how important it is that you’re realistic about recording everything accurately.
Yes, being this realistic can sometimes be a chore, considering you have to chase down things like:
- Would your stop-loss have gotten hit today?
- 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 Pro you can make the process much easier with our state-of-the-art paper trading feature.
You simply enter your trades into the platform just as you would when trading a live account.
But you won’t have to check each day for things like your stop-losses getting hit or your entries being filled — the StocksToTrade software does it all for you and provides you with feedback on how your trades work out.
The STT Pro paper-trading feature could save you hours each day so that you can focus on finding the best setups and becoming profitable as quickly as possible. Sign up for STT Pro now to get started.
But it’s not just paper trading that STT Pro can help you with …
With STT Pro, you also get daily market webinars with our lead trainer, Tim Bohen, where you watch as he builds his watchlists and maps out the trading day. He also streams the market close so you can exit positions and build a trading plan for the next day!
You can also gain insights from other traders in the exclusive STT chatroom and learn cutting-edge trading tactics in the weekly strategy webinars.
So, if you’re serious about becoming a top trader, don’t just sit there by yourself, recording your paper trades in your notebook. When you go it alone, you risk making small-but-critical mistakes that deplete your profits.
Join StocksToTrade Pro and be part of an elite community, sharing knowledge and using the best tools to help you take on the stock market. Join us at STT Pro today!
Do you paper trade? How long do you usually practice before going live? Tell us below!