Paper Trading

Written by Jacey Harmon
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For new investors the financial markets are quite intimidating. Symbols, quotes, volume, data, talking heads all combine to make a confusing picture. To slow things down a bit, new investors will be better off if they focus on a particular sector of the markets. Choose to focus on a particular investment vehicle and trading strategy. Once you have narrowed the market down you can begin to "paper trade."

Advantages and Disadvantages of Paper Trading

Paper trading is simply practicing a trading strategy without risking capital. You approach paper trading exactly as you would a real trade. You want to take into account everything you would if it was a real trade. You simply record your trade on paper and follow it accordingly.

One of the benefits of paper trading is it allows new investors to get a feel for the market. You gain valuable experience by seeing how the market reacts on a daily basis. Another benefit can help new and experienced investors alike. Paper trading is a good way to test the validity of a trading strategy. You can check if a strategy has any flaws without risking any capital.

The disadvantage of paper trading is it isn't emotionally the same as real trading. Once you have real capital involved, your emotions will play a role in your decision making. Paper trading, however, is a good way to practice a detached and objective trading approach. Until you actually get in the market and place trades you won't be able to get a real sense of trading, though. Just try and make the paper trade as realistic as possible and you will benefit from the practice.

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