Today we are discussing the term "Paper Trading". It means conducting trading activities that allow investors to practice working on the markets without risking their money.

Let's tell you what the essence of such trading is, what the advantages and drawbacks are, how to use it, and what the difference is from real trading.

What beginners need to know about paper trading

This term has come from the stock market and practically means trading on a demo account. The investor models their trades, analyses them, and counts profits and losses on their positions.

Paper trading lets the trader assess their strengths, get more practice on a virtual account, check and improve their trading strategies, and learn to follow signals from more experienced market participants.

Practising on a demo account is a great opportunity for beginners to adapt to market conditions, and get acquainted with all the features of the trading platform before investing real money.

How to conduct paper trading

Nowadays, most online brokers offer their clients access to free demo accounts. For practising on such an account, traders get a virtual amount in their account, which allows them to start working on real charts. Let's go through trading on a demo account step by step:

  1. Register on the website. By registering on the company's website as a client, you are requested to fill out a form, usually specifying your email and password. Some companies may ask for more personal data.
  2. Install the platform. Downloading and installing the platform is simple and takes very little time. Once the installation is completed, you may select instruments and set up charts.
  3. Open an account. As soon as the platform is set up, you may open a demo account for beginners. This can be done on the platform or from the PMA on the broker's website. The data you get should be entered on the platform. It is recommended to use a realistic capital size to understand demo trading and possible profitability.
  4. Trade. The last step is to make a trade. Moreover, apart from tracking your current positions, you can also monitor your trading history.

Advantages

  • Studying the basics of trading. Trading is not only about selecting the correct instruments for market analysis but also knowing how to control your position, close it timely, and look for new opportunities to enter the market
  • Checking out new strategies. Checking out trading ideas is useful not only for beginners but for experienced traders as well. This account type allows for testing your tactics on the asset history
  • Working with new instruments. You can add new instruments to your portfolio, study their behaviour on a demo account, and choose the best strategies for each

Drawbacks

  • Increased confidence. Losing real money is a painful experience that teaches traders to make better analyses, be more responsible, cautious, and as far-seeing as possible; and never to stop developing their skills. A demo account does not provide such an experience
  • Unrealistic capital. Quite often, the capital on the demo account exceeds the real one that's available for the trader. The investor who is used to working with big lots struggles when having to trade smaller lots after switching to a real account

Summary

Paper trading means working on a free demo account with real charts. It is useful for beginners who get the chance to enter the world of trading in a fast and safe way, and also for experienced traders who would like to use more instruments or check out a new strategy.

Nevertheless, although this trading method has advantages, there are also drawbacks. The main disadvantage is that demo accounts do not provide real trading experience, where the threat of losing real money motivates investors to constantly improve themselves.


The material presented and the information contained herein is for information purposes only and in no way should be considered as the provision of investment advice for the purposes of Investment Firms Law 87(I)/2017 of the Republic of Cyprus or any other form of personal advice or recommendation, which relates to certain types of transactions with certain types of financial instruments.


Material is prepared by

A financial analyst and successful trader, Andrew prefers highly volatile instruments. He is actively involved in creating various educational materials for RoboMarkets clients.