What Is Paper Trading?

Many people have contemplated saying, “To heck with it,” packing up and leaving their jobs. For anyone in the field of finance, one lucrative daydream that springs to mind is making a career out of day trading. After all, the prospect of amassing great wealth with no boss is enough to tempt even the most cautious of people.

But, how do people get started trading? With practice. Paper trading is a useful tool for both beginners and advanced traders, as well as new investors who want to familiarize themselves with financial markets.

What Is Paper Trading?

Paper trading is a type of simulation that allows people to use a “pretend money account” to trade with zero risk. This is one main difference between paper trading and real trading — no actual money is put at risk with paper trading. A paper trading account will give the same look and feel as a normal real money account would, but ultimately, trades offer no real material gains or losses to the account owner.

So, what’s the point of paper trading? In essence, paper trading is mostly for educational purposes. For brand-new investors, it’s an effective way of dipping their toes into how complex financial products such as equities, stock options, foreign exchange (FOREX) and futures work. It acts as a testing mechanism of how to gauge volatility and how real markets work.

Paper trading isn’t just for beginners, though. It can be an effective way for seasoned traders to test out some new stock market and FOREX strategies that could increase profits. Paper trading is a useful resource for testing and learning about market indicators while incurring no actual risk. By taking the time to research and practice, they can then implement new trading strategies in real accounts.

Paper trading is also available for crypto. Platforms like Cryptohopper offer users tutorials, as well as resources for following technical indicators and candlestick patterns. Some other features include algorithm intelligence capabilities and automatic trading.

Best Free Paper Trading Apps

Here are some of the top paper trading apps to choose from.

InteractiveBrokers

With InteractiveBrokers, signing up for a regular trading account and making a deposit automatically gives users access to paper trading accounts. Paper trading simulates one-for-one with a normal account, giving customers access to all of the same financial instruments.

TD Ameritrade (thinkorswim)

TD Ameritrade owns the paper trading platform, thinkorswim. It is one of the most popular paper trading platforms, and it has desktop as well as mobile app functionality. TD Ameritrade has multiple educational resources for members to use, and paper trades can be executed 24 hours a day, five days per week.

Tradestation

Tradestation is also available on desktop and mobile devices, and its app is listed on both the Apple App Store and Google Play Store. Tradestation offers insight into market indicators and allows users to backtest data. Overall, it is best suited to advanced traders.

Is Paper Trading Worth It?

Paper trading can certainly make someone a better trader and investor, and there is no financial risk involved. After someone has been paper trading for several months, they will likely move over to live trading. The period of time someone should take before moving to real trading will depend on their experience and the hours they dedicate to a paper trading account beforehand.

One downside to paper trading is a disconnect from the real markets. Since there is no actual money in jeopardy, paper traders tend to perform actions that aren’t necessarily a representation of their true risk tolerance.

Final Take

Paper trading is an excellent resource that all categories of investors and traders can take advantage of. Despite this, there is no real substitute for live trading when real money is at stake. Real trading is the best way to figure out a proper appetite for risk.

FAQ

Here are some questions people ask about paper trading.

• What is meant by paper trading?

  • Paper trading is a type of trading simulation where the money used to trade isn't real. It can be considered pretend or "fake" money.

• Is paper trading good for beginners?

  • Paper trading can be an excellent source for beginners and advanced traders. It teaches trading fundamentals and risk management under real market conditions.

• How do I start paper trading?

  • Several platforms offer paper trading. These include but are not limited to InteractiveBrokers, TD Ameritrade (Thinkorswim) and TradeStation.

• Which platform is best for paper trading?

  • TradeStation offers one of the most comprehensive platforms for paper trading.

Information is accurate as of June 14, 2022.

This article originally appeared on GOBankingRates.com: What Is Paper Trading?