Paper Trading – Is It A Worthwhile Exercise?

(by Jim Buccini - my article)

Paper trading is where you make dummy trades with no real capital being used, and is where most traders start their trading career. It allows you to make decisions and trade accordingly, on paper only, so you can freely try out different techniques and learn how the markets move. Ultimately though, is paper trading really a worthwhile exercise?

Well there's no doubting that if you're completely new to the world of trading, then I would say that it's almost essential that you place trades on paper only, before you risk any of your hard-earned money on the markets.

The financial markets, whether it's stocks, commodities, forex or any other markets, are a ruthless place. The professional traders, and indeed the financial institutions, have no qualms about taking your money from you. Therefore, it is indeed a good idea to trade on paper initially, and become accustomed to placing trades and seeing what works and what doesn't, before you start trading for real.

Paper trading also enables you to use, and get to grips with a particular trading platform that you may choose to use. For example, many brokers now offer newcomers a practice account, where they can practice making trades and become accustomed to using the particular company's trading software. So this is another positive benefit of paper trading.

For the more experienced trader, there are also added benefits. By placing pretend trades, you can effectively try out any new technical indicators or systems that you may discover.

So what are the downfalls of paper trading?

Well, unfortunately no matter how many trades you do on paper, the harsh reality is that it will often give slightly false and misleading results. This is because nothing comes close to real-life trading with real money. The emotions and mindset are completely different when real money is being staked, which is why overall I think paper trading is only worthwhile up to a certain point.

It's only when you start trading for real that you notice how much different it is to trading on paper. The markets seem to move faster, your heart beats faster, and you have to make split second decisions. There's also a bigger fear of losing, which you cannot recreate unless you're trading for real.

So to conclude, if you're new to trading, then yes it is a good idea to paper trade only to begin with, but please remember that no matter how successful you may be on paper, it's only when you start trading for real, that you can identify how good a trader you really are.

If you're looking for a forex trading platform, I can highly recommend Easy Forex. They offer competitive spreads, guaranteed stop-losses if required, live training and support, and you can start trading with as little as $25.