The Good and bad sides of Paper trading
Most people, while entering into financial markets, always have a fascination for paper trading, because there is no real money in play. This has some advantages and disadvantages. We will discuss those in this blog. Stock trading is an art which becomes perfect with practice. But how should a new trader practice? Will paper trading help in this aspect? Let us do a review.
Paper trading is the practice of trading either digitally or manually, without the involvement of real money, where traders mark down their entries or use paper trading accounts and follow their trades. Since there is no real money involved, New traders prefer this method to get to “know” the markets, taking emotions out the table. Sadly, these people don’t realize that trading is a mental game. As experts have rightly pointed out, trading is 90% emotions and 10% skill.
What happens with paper trading?
Traders understand that conventional wisdom is of little importance to trading success. Our brains are wired to think in certain ways, and our ability to think varies when we are impacted by emotions. Traders should have the ability and the emotional intelligence to think on their feet and this skill can be honed by practice.
When we do paper trades, we conveniently ignore emotions. Mathematics takes over mental skills. Imagine playing a game of chess with a computer, No matter whether you or loose, there is neither a feeling of accomplishment, nor fun. People practicing in paper trading, will mostly be in profits, as they are at freedom to decide where the enter and exit as per their whims and fancies. But real markets are different.
A trader’s mind has to compete with High speed computer systems and there will be full of challenges and obstacles, which sort of make trading excitement. A trader should learn to enjoy this excitement and not to give in to this excitement, else it might become an addiction. Real challenges in the market can be understood and tackled only when real money is involved.
When can this be used?
Emotional control in trading can be known when there is skin in the game, but this paper trading can be used in certain areas, like testing a new strategy. Successful testing of a strategy has to be done over vast sets of data and it may not be possible to know the efficiency of these strategies, if data set is not sufficient. So paper trading may find an application here.
If you are very new to trading, it may be used to understand the jargons of trading. It may also teach you the discipline required for trading success. Though paper trading may help build confidence, it may not be of great help, as this may be false, because trading shifts to a whole new dimension, once real money is involved.
So to conclude, it can be said that, swimming can be learned in swimming pools, it cannot help some one swimming in sea, as sea presents different sets of challenges. Traders should understand that trading is like swimming in the sea.