What Is Paper Trading?
Paper trading refers to the act of buying and selling securities using fake money. It allows investors, usually newbies, to practice trading without risking real money.
Paper Trading is a simulated trading process where a would-be investor practices buying and selling securities. It essentially offers the same experience as actual trading, except that fake money is used, so the investor does not lose their money.
The term “Paper Trading” originates from a period when online trading platforms were not in vogue, and aspiring investors kept track of their hypothetical trading positions, profits, or losses by recording and tracking their simulated positions. Simulation software is often used in the present day.
Most trading platforms today offer users two types of accounts – a demo account and a live account. A demo account uses fake money, while a live version uses real money. When dealing with a demo account, investors are allowed to test new strategies before using them live.
- Zero Risk: Fake or hypothetical money is used, and it allows investors to try several strategies without the risk of losing their money if things go south.
- Perfect for practicing: It offers an excellent and risk-free testing ground for newbies. A would-be investor practicing over and over again soon learns the ropes of trading.
- Eliminates emotions: Greed and fear are two emotions that investors face when trading with real money. It allows investors to bypass those emotions and focus entirely on the mathematical process.
Paper trading is a replica of the actual market, traders can see what their profits and losses may have been. The only difference is that fake money is used.
Paper Trading Example
A forex trader enters a long position with the Euro against the Canadian dollar to test a trading strategy. Unfortunately, it goes south, and the trader loses the trade. However, because the trader is paper trading, they don’t suffer any financial loss.« Back to Glossary Index