Paper Trading, or “Paper Trialing” is a way of testing a trading strategy, system or service but on “paper” without actually risking any of your own money. Many will advocate doing this before you actually commit any of your own cash into the markets and this is usually applied to all forms of gambling and sports betting too. This could also just be trading with a strategy using a demo account rather then your own money.
However, is paper trading really as good as it is made out to be? Here are the pros and cons of paper trading.
Don’t Risk Your Own Money
The most obvious pro to paper trading is the fact that you do not risk your own money. When testing out any strategy you obviously do not know if it will be profitable and plenty of money can be lost testing them out before you can draw any conclusions. At least if you paper trade with “monopoly money” you can keep track of the results without potentially losing money also.
It Is Stress Free
When you are not using your own money it can make testing out a system or strategy to be risk free and also stress free. I am sure many reading this will be guilty of following something for a certain amount of time but giving up just as quickly if the profits were not being produced. It is a mathematical certainty that there will be losing runs with any system and you may have just been unlucky enough to being trading at the start of a losing run. If you are just paper trading you will be far more likely to keep following it rather then if using your own money. The stress of losing money will probably lead to you giving up and never wanting to look at it again!
Don’t Risk Your Own Money
The biggest con of paper trading is also the pro. When you are not risking your own money you are potentially not recreating the exact conditions that will apply to you when you are actually using real money. This obviously depends on what you are following exactly, but I can guarantee you that trading with “fake money” is much easier then trading with your own real money. I remember learning a similar lesson when I spent some time playing Poker full time. I originally learned how to play the game on the money free tables and thought I could make the step up. However, it is a totally different kettle of fish once money really is on the line. Your decision making process is definitely affected and, because of this, I know many traders that will suggest you should never actually paper trade at all and it is best to dive right in.
Potentially Miss Out On Profits
If you paper trade something and it goes well initially and is making profits then these are actually profits you are missing out on. So then you have a dilemma, do you scrap the paper trading and dive in with real money or do you stick with it for a bit to see how it goes in the longer term? The problem can be that a system might produce big profits when paper trading, then you switch to real money and suddenly it goes through a bad run. This will then put you back in that position of wanting to just give up on it since you are now losing your own money on it despite the fact that the system itself is probably still in profit.
Whichever way you look at it, it is always probably best to trial something for a period of time before you commit your own money. If you are just starting out you are probably going to have to test many strategies before you find something that suits you and you can not risk your own money on all of them!
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