When you start to learn about trading, how do you check that your system is profitable or not?
Without testing your trading system, it is very risky to put real money into the trade. Paper trading helps you to test your trading strategy, without risking your real money.
So, let’s find out how to use this method and improve your trading in stock market.
- What is paper trading?
- How to paper trade in stocks
- Benefits of paper trading
- Shortcomings of paper trading
- Final thoughts
- Frequently Asked Questions
What is paper trading?
Paper trading is simulated trading method that helps beginners in stock market to learn and practice trading without putting your own money at risk.
The reason it is called as paper trading is because it is done on paper. And you don’t even need a trading account for same.
Actually, before we had the benefit of stock simulators to help in testing, this was the only method.
What you do when paper trading is that you look at real time market data and decide about your trades.
You note down on a paper (trading journal) about the trade you took, with stop loss and target (if that is there in your trading system).
And when you close your trade or exit your position, you note down that too.
Now, without risking your money, you have traded in stock market and also if you trade was profitable or not.
How to paper trade in stocks
- First you decide the base capital with which you will trade and note it down in your trading journal.
- Select the stocks/index futures of your choice as per trading system.
- Now, as per your trading system, you wait for trade to trigger.
- When you decide to take a trade, you note down the price at you entered the trade and which security.
- When you exit the trade, you note down — exit price, profit/loss in the journal.
- Please make sure to deduct the brokerage or transaction fee from that figure for each trade.
The main idea here is to record your trades as close to reality as possible.
Benefits of paper trading
When you are learning trading, especially under a mentor, he will always recommend you to practice it on paper first.
The reasons are the benfits listed below:
Learning about trading process itself
The very process of recording your trades makes you, a beginner, about the minor but important steps that go in trading in stock market.
You get to know things like slippage, types of orders and managing your trades.
Improving skills without risking money
Paper trading apps allow you to show the reality of your trading strategy. When you identify some improvement that needs to be made, you can do that.
And only when you get comfortable about your trading strategy and your learnings, you can try it in real trading account.
All this is done without risking your main trading capital.
Trying new strategy
Let’s say you read about a new trading strategy. How to test that this is profitable to you?
You can do that by paper trading that strategy. There is no need to include any strategy in your main trading style, when you can test it on paper.
Shortcomings of paper trading
Even after so many benefits, there are some shortcomings in this learning process.
Lack of emotional factor
One of most important factor in trading is emotional factor. Fear and greed effect your trading decision the most.
In paper trading, your real trading money is not involved, thus there is no fear of losing your capital.
Lack of this fear, allows to paper trade perfectly. And, when you shift to real world trading, these emotions are strong. They do effect your trading.
Which leads to many new traders complaining that there trading system failed when they traded with real money.
All the orders are perfectly executed
Though current stock simulators try to execute your orders on as much real time as possible, the reality is all the orders get executed.
This doesn’t always happen in real life.
In real trading, it is normal that your order gets executes at price which is slightly above or below the intended price. Even in case of limit order, sometimes the whole order is not executed and you have to modify.
Then there is reality of volatile market, when terminals can hang or orders are stuck. These are the things, that never happen in paper trading.
Beginner traders (as well as investors) can benefit huge from paper trading, if they use it as way to understand how the trading and investing works.
It is an important tool to test waters, when you are just learning about stock market terms.
The only thing you need to be careful about is maintaing a trading journal so that you can measure and improve your skills.
Frequently Asked Questions
How long to practice paper trading?
You should practice paper trading, for at least the duration of 4-5 weeks.
The basic idea is that, this process is repeated for minimum of 20-30 times for short term trading setup and at least 10-15 times for swing/longer duration trading setup.
Once you are confident, the real learning will come from trading in real account only.
What are the paper trading apps in India?
You can try paper trading in stock simulator platforms like moneybhai, moneypot in India. You can find the list of the best virtual stock trading platforms in India in this post.
How to do paper trading in Zerodha or Upstox?
To get real time experience, you can open trading account with Zerodha or Upstox.
Once you have trading account, you can get prices and charts from your trading terminal. You can then decide about your trades, check live prices and enter your trades in your trading journal.
Don’t enter your trades in trading terminal. The job of trading terminal is to show you live realtime prices.
How to start paper trading?
You will need to have 3 things before you start paper trading:
1. A trading strategy
2. Access to a stock simulator or trading terminal (for prices).
3. Trading Journal.
Once you have these basics, you can start paper trading.