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Among the millions of people who aspire to become successful stockbrokers, only a handful manage to make it. Some consider trading as a mere hobby, while others try and give up. One of the biggest mistakes people make about trading is that they underestimate the real-world experience: the risks, the potential losses, the split-second decisions, and other factors.
As a novice in the field, stock trading can be overwhelming, especially with the plethora of terminologies, rules, and the pace at which the markets move. The best place for you to start trading is not in the real stock market but in a virtual market. Here is everything you need to know about a paper trading account, and why it is good practice to use one even as a professional stockbroker.
What is Paper Trading?
Paper trading is the act of buying and selling securities and financial products in a simulated market. In essence, online paper trading platforms give stockbrokers exposure to the stock market without real stocks or money.
Who Should Use Paper Trading?
With the advancement of technology, today’s paper trading software platforms are sophisticated enough to replicate several market scenarios that you are likely to encounter as a trader. Typically, rookie investors practice their strategies and get the hang of the acts of buying and selling securities through a paper trading account. The environment makes it possible for people to understand the concept of trading without getting clouded by emotions like greed and fear.
Benefits of Having a Paper Trading Account
The benefits described below typically apply to novice traders, but professional stockbrokers can also find these tips useful.
1. Emotion-Free Setting
As mentioned earlier, fear (of not making a particular sale, not meeting goals, and so on) and greed (the constant want for more profits) are two of the main driving forces behind bad stock market decisions. The ideal stockbroker leaves all emotional ties at the door and trades purely based on data, statistics, and facts.
In paper trading, you have nothing to gain, except experience and practice. The fact that nothing at stake makes you trade systematically is what you should do at all times, even when real money is involved.
2. Building Confidence
The critical ingredient every rookie investor needs to continue their journey in the stock market is confidence. In the real world, you will be competing against veterans and institutional brokerages, who are unlikely to go easy on you because you are new.
The simulated environment in a paper trading platform gives you the much-needed assurance that you are also capable of executing deals and carrying out strategies. As you practice more, you also become less stressful, which, in turn, gives you a much better chance of realizing profits in the actual market.
3. You Can Make Mistakes
Mistakes in the stock market can cost you thousands of dollars, even if it is due to something as silly as the accidental push of a button. Seeing a string of losses with real money can be discouraging, but with paper trading, you can afford to lose money if you learn something useful in the process. No stockbroker has ever become successful without stumbling along the way, but when you have the opportunity, it is better to make the errors with virtual money.
Professional stockbrokers also find this feature useful since they often want to try out risky new strategies. The best investors devise their techniques instead of blindly copying that of others, and no original method is created right in the first attempt.
By simulating the required scenario on a paper trading platform, you get a reasonable prediction of how successful your tactic will be in the real market. You can also track the events that occur to pick out the exact techniques that do work and the ones that do not.
4. Learning on the Go
You can never learn “everything” there is to know about the stock market; the more you trade, the more new terms, concepts, and scenarios you will encounter. Facing something new in the real market can be daunting, especially when there is a significant stake involved. You could be unsure of how a particular financial product works, what a specific rule implies, or notice an unusual trend whose significance you cannot make out.
In stock trading, you need to understand the theory behind trades, the technology available, and practical tips on handling situations. For example, if you are dealing with stocks, you should know what the stock price is, how to interpret it, and what its fluctuation means. You should also understand the various controls on the interface that lets you buy or sell the stock, including terms like stop-loss orders, put options, and so on.
5. How to Manage Algorithmic Trading
In today’s world, most of the trades are executed by computers through techniques like algorithmic trading. Machines have the power to trade thousands of securities in seconds, which humans cannot do. All professional stockbrokers working for institutional brokerages invariably use algo trading to carry out trades.
Not all paper trading platforms allow you to execute such bulk orders, but you can still test the proof of concept on a small scale. When confident enough, scale it up and try the same in the real market. You cannot hope to simulate every possible scenario in paper trading, especially those with such a high volume of trades, but use the simulator to get an idea of how good the strategy is.
A Word of Caution
You should remember that, ultimately, the actual market is different because real money can make people behave differently. You can be motivated by the success you get in the virtual market, but that is no guarantee that you will also make profits in the real world.
Still, it is always good to start your trading career on an online virtual platform until you are confident enough to execute some basic strategies. Perfecting the art of stock trading takes years of continuous effort and practice, so you can use these platforms to test out and refine your methods even if you are a professional broker. This form of commission-free trading will undoubtedly come in handy as long as you trade in the stock market.