The Complete Guide to Paper Trading

Paper trading is a risk-free way to practice investing and test strategies before putting real money on the line. This comprehensive guide will teach you everything you need to know about paper trading.

What is Paper Trading?

Paper trading, also known as virtual stock trading, involves practicing investments without using real money. It works by allowing you to simulate buying and selling stocks, options, forex, and other securities using fake money.

When you paper trade, you can place pretend orders and track imaginary gains and losses. It provides a safe space to gain experience, develop strategies, and learn the mechanics of trading without financial risk.

Benefits of Paper Trading

Here are some of the main benefits of using paper trading:

  • Learn how to trade stocks, options, forex etc. without losing money
  • Test strategies and theories before investing real capital
  • Gain experience with placing orders, managing positions, and more
  • Build confidence and learn from mistakes without real financial loss
  • Practice trading psychology and emotional control
  • Backtest trade ideas across any time period or market condition
  • Experiment with high-risk strategies without worrying about loss
  • Try out broker platforms, tools, and features before opening a live account

Overall, paper trading allows you to improve your skills while avoiding the stresses and risks of real money trades. The hands-on practice helps prepare you for real-world investing.

Limitations of Paper Trading

While beneficial for practice, paper trading does have some limitations to be aware of:

  • Does not account for slippage, liquidity issues, and other real market frictions
  • Ignores the psychological pressures of having real money at stake
  • Trading costs like commissions and fees are not factored in
  • Price data may be delayed and out of sync with live markets
  • Harder to simulate advanced order types like stops and options
  • Gains and losses are imaginary so it can lead to overconfidence

The simulated environment differs from having actual capital on the line, so paper trading strategies should still be validated before going live. But used properly, it remains an invaluable learning tool.

How to Start Paper Trading

Getting started with paper trading is straightforward and only takes a few steps. Here is the basic process:

  1. Choose a brokerage platform or paper trading simulator
  2. Open a demo or paper money account
  3. Fund your practice account with virtual money
  4. Select paper assets to trade and place pretend orders
  5. Track gains, losses, orders, portfolio value over time
  6. Analyze performance and learn from the experience

Many online brokerages offer demo accounts to clients alongside live trading accounts. This allows testing with their specific platforms, tools, and data feeds.

Alternatively, some third-party sites provide paper trading simulators for broader practice. These can be used to experiment across stocks, options, crypto, forex, and more.

When just starting out, begin with smaller position sizes and simpler strategies. As you gain experience, you can try more advanced techniques with larger imaginary account sizes.

Set measurable goals and performance metrics to track progress over time. Review the results periodically to improve skills.

Step-by-Step Guide to Paper Trading

Follow this step-by-step guide to start paper trading quickly:

Step 1. Choose a Paper Trading Platform

The first step is selecting software to conduct your virtual trades. Here are some top options:

  • Broker demo accounts – Most online brokers like TD Ameritrade, ETRADE, and Fidelity allow paper trading with demo accounts. This mimics their live platforms.
  • Third-party simulators – Sites like Investopedia Simulator, WallStreetSurvivor, and OptionsPlay provide virtual trading environments across multiple asset classes.
  • Spreadsheet trackers – For basic practice, you can use Excel or Google Sheets to manually track pretend positions over time.
  • Trading journals – Apps like Edgewonk and Tradingsim have built-in paper trading functionality along with journaling features.

Consider ease of use, variety of assets, data quality, tools, and costs when choosing a platform. Many broker demos have time limits while third-party simulators may charge subscription fees for access.

Step 2. Open a Practice Account

Once you select a platform, open a virtual account to fund with imaginary money.

For broker demo accounts, you typically need an existing live brokerage account first. Follow their sign-up process and request demo access if needed.

With third-party simulators, you simply create a new paper account like you would a live one. Be sure to use a separate and unique username/password for security.

Demo accounts often start with $100,000 or more in pretend capital so you can make realistic sized trades. Some allow resetting the balance if you lose the initial amount.

Step 3. Fund Your Paper Trading Account

After opening your practice account, add virtual funds to trade with.

Most demos come preloaded with starting capital like $100,000. But you may be able to customize this amount or top it off if the balance drops due to imaginary losses.

Monitor your equity curve and portfolio balance like you would an actual account. Try to grow the virtual funds over time with successful paper trades.

Some platforms let you reset your practice balance if it goes to zero. Use this feature judiciously – don’t simply reset every time you lose fake money or it defeats the purpose.

Step 4. Select Assets and Place Trades

Now it’s time to pick assets and execute pretend trades. Begin with a written trading plan if using strategies.

Research securities using demo platform tools or external sites. Look for paper trading opportunities based on indicators, events, catalysts.

Place virtual buy and sell orders just like live trading. Use market, limit or other order types. Practice shorting stocks and trading options if desired.

Start small with share sizes and build up over time. Execute both winning and losing positions to experience different outcomes.

Tip: Take screenshots of orders for recordkeeping. Jot down your reasoning behind trades in a journal.

Step 5. Track Gains and Losses

Monitor open paper positions and portfolio performance daily.

Follow equity curve and net profit/loss like a real account. Calculate percent returns over time and other metrics.

Update records with any pretended dividends, stock splits, corporate actions. Paper trade through earnings reports and volatility events.

Review detailed position reports, trade logs, filled orders. Analyze profits, losses, fees, slippage and other impacts.

Step 6. Analyze and Improve

The key to successful paper trading is regularly analyzing activity and results. Identify what is working well and areas needing improvement.

Every few weeks, formally review metrics, journal notes, and performance trends. Assess strengths and weaknesses in your strategy execution.

Make incremental changes and practice new techniques. Experiment with position sizing, risk management, timing, etc.

Set new skills goals like trying complex options strategies or improving trading psychology. Continue paper trading until consistently profitable.

By actively reviewing and analyzing trades, you can refine abilities and develop as an investor without losing money.

Best Practices for Paper Trading

Follow these tips and best practices when paper trading to maximize learning:

  • Treat it seriously – Put in the same time and effort as real trading. Execute with precision and discipline to ingrain good habits.
  • Start small – Begin trading micro lots and miniature positions. Slowly increase size as skills improve.
  • Use realistic capital – Trade with a simulated account balance comparable to what you have for live investing.
  • Stick to a plan – Develop a written trading plan and follow it consistently in paper trades. Practice executing your strategies.
  • Take notes – Journal trade details, reasoning, market conditions at the time. Review regularly to improve decision-making.
  • Paper trade consistently – Set a schedule and trade regularly to ingrain lessons, not just occasionally. Practice across different market environments.
  • Track detailed records – Log fills, orders, P&L, positions, fees, slippage and more as if real money. Analyze the data.
  • Lose money intentionally – Execute some losing trades and handle drawdowns. Experience mistakes and volatility impacts firsthand.

Adhering to proven best practices will lead to greater preparation and confidence before placing real trades.

Paper Trading Strategies

You can practice nearly any investing strategy with paper trading. Here are some common approaches:

  • Technical analysis – Backtest chart patterns, indicators, and timing systems. Practice day trading techniques using virtual capital.
  • Fundamental analysis – Research company and industry fundamentals. Invest based on earnings, financial metrics, competitive advantages.
  • Dividend investing – Build a pretend portfolio of dividend stocks. Reinvest virtual dividends over time and track growth.
  • Value investing – Look for low P/E, P/B stocks to hold long-term. Practice valuation methods and financial modeling.
  • Swing trading – Hold paper positions for days or weeks at a time. Practice identifying range breakouts and pullbacks.
  • Options trading – Test different options strategies like covered calls, spreads, and combinations using paper contracts.
  • Algorithmic trading – Code and execute automated paper trading systems to determine efficacy.

Paper trade enough to solidify a strategy before putting real money at stake. Continue honing tactics over time.

Paper Trading Platforms

There is a wide variety of paper trading platforms available today. Here are some of the most popular choices:

Broker Demo Accounts

Most online brokers offer paper trading access through demo accounts:

  • TD Ameritrade – PaperMoney virtual trading platform is available to all clients. Integrates directly with thinkorswim and the live market.
  • Etrade – Offers Demo trading accounts with $100,000 in pretend funds to practice on their web and mobile platforms.
  • Fidelity – Fidelity Practice Trading gives users $100,000 in virtual capital along with free demonstrations and webinars.
  • Interactive Brokers – Lets clients open a paper trading account to test strategies across global markets for free.
  • Charles Schwab – Provides virtual Schwab accounts with streaming data and Schwab tools to simulate real trading.

Third-Party Simulators

Some popular third-party paper trading platforms include:

  • Wall Street Survivor – Offers a stock market game with virtual trading and a leaderboard. Begin with a $100,000 paper money balance.
  • Investopedia Simulator – Provides $100,000 in virtual funds for stocks, forex and options trading practice. User forums discuss strategies.
  • Think-Or-Swim – TD Ameritrade’s standalone paperMoney platform with lots of tools. $100,000 practice balance and ability to trade various securities for free.
  • OptionsPlay – Specialized for options trading practice. Start with up to $500,000 in pretend capital to test options spreads and combinations.
  • MarketWatch Virtual Stock Exchange – Offers fantasy portfolio management and stock picking contests to compete against others with virtual money.

Spreadsheets and Journals

For low-tech options, use an Excel spreadsheet or trading journal to manually track paper positions, orders, P&L, and account balance over time. Add formulas to calculate metrics and performance reports.

How to Get the Most out of Paper Trading

Follow these tips to ensure paper trading prepares you for real-world investing success:

Treat It Like Real Money

Paper trade as if your actual money was on the line. Execute precision orders, track closely, and analyze regularly as you would with a live account. Don’t be reckless just because it’s pretend – bad habits form easily.

Make It a Routine

Schedule regular practice sessions in your calendar, not just occasionally. Paper trade actively across different market conditions. Consistency ingrains knowledge and skills.

Start Small

Trade one share at a time, then gradually increase position size as you gain competence. This mimics the progression of a funded account starting from a small base.

Embrace Losses

Don’t just paper trade winners. Take losses intentionally at times to experience drawdowns emotionally and financially. Manage risk and handle volatility.

Review Trades

Analyze good and bad paper trades in a journal. Identify what worked well and where you can improve decision-making, strategy, or discipline.

Have a Plan

Follow a written trading plan for entry and exit rules, position sizing, risk management etc. Test and refine strategies. Execute trades deliberately according to the plan.

Use Realistic Balances

Paper trade with an account balance you have or are working towards in actual capital. This provides realistic context to position sizing and risk exposure.

Go Long-Term

Paper trade over months and years, not just days or weeks. Practice long-term investing horizons in addition to short-term trading.

With dedicated practice paired with routine review and analysis, paper trading can take your real-world investing to the next level.

Common Paper Trading Mistakes

While paper trading is useful, it comes with some common mistakes. Being aware of these pitfalls can help you avoid developing bad habits:

  • Not taking it seriously – Just going through the motions without proper discipline as if the money is not real.
  • Lacking realistic context – Trading with inflated account balances, tiny lot sizes that do not reflect reality.
  • Trading too infrequently – Conducting occasional trades instead of regular practice across diverse market conditions.
  • Lack of written plan – Trading whimsically without a strategy, risk management rules, or criteria.
  • Resetting losses – Endlessly resetting the balance after losing instead of experiencing drawdowns.
  • Overleveraging – Using excess margin and position sizes beyond what you could trade in reality.
  • Ignoring fees/slippage – Executing without accounting for real costs and frictions that affect profitability.
  • Lack of review – Not analyzing trades, performance, psychology to identify strengths, weaknesses and opportunities to improve.
  • Lack of evolution – Continuing with flawed strategies or mindsets without adapting as learning progresses.

Avoiding these missteps takes some diligence up front, but results in greater preparation for eventual live trading.

Paper Trading Tips and Strategies

Here are some additional tips and strategies to enhance paper trading:

  • Add pretend trading costs like commissions, fees, margin interest to mirror reality.
  • Practice short selling, options strategies, margin trading, and other advanced tactics.
  • Paper trade through actual events like earnings, economic data, and volatility.
  • Maintain detailed records with timestamps, returns, rationale, events, performance stats.
  • Consider psychological factors like greed and fear. Practice discipline even without real money risks.
  • Code algorithms and test automated paper trading systems before going live.
  • Join paper trading competitions to compare with others’ performance and learn from differences.
  • Backtest strategies over years of historical data. Optimize before real-world application.
  • Practice building concentrated positions as well as diversified portfolios.
  • Discuss trades and performance trends with other paper traders to gain outside perspective.
  • Transition to smaller live trades while paper trading larger positions as skills improve.

Regularly incorporating proven paper trading tips will accelerate the learning curve.

Paper Trading Platform Comparison

Here is a comparison of key features across popular paper trading platforms:

PlatformAssetsToolsCharts & DataAccount BalancesCost
TD Ameritrade PaperMoneyStocks, options, futures, forexScanners, studies, backtesting, screenersAdvanced thinkorswim charts$100k+ pretend capitalFree with live account
Etrade Demo AccountStocks, options, mutual fundsPrebuilt screens, risk analysisReal-time data and charts$100k virtual moneyFree demo account
Wall Street SurvivorStocks, ETFsLeaderboards, paper trading tipsBasic charts$100k initial balanceFree registration
OptionsPlayOptions onlyVolatility analysis, option Greeks, P&L calculatorLimited chartsUp to $500k virtual capitalSubscription plans ($9-$149/mo)
Investopedia SimulatorStocks, options, forex, cryptoPortfolio analysis, screeners, forumsReal-time Level 2 data$100k initial capitalFree registration
SpreadsheetsAny assetsCustom formatting and formulasManual entry or plug-in pricesCustomizableFree

Consider available asset classes, tools, data quality, account size, and costs when choosing the ideal paper trading platform for your needs.

Frequently Asked Questions

Is paper trading really helpful for beginners?

Yes, paper trading is extremely helpful for beginning investors to practice and learn without losing actual money. It allows experimenting with orders, securities analysis, system development, and strategy execution in a risk-free environment while gaining valuable experience.

What are the best markets for paper trading?

The most common assets for paper trading are stocks and exchange-traded funds (ETFs). But you can also paper trade options, futures, forex, and cryptocurrencies on many simulation platforms. Start simple before advancing.

How long should you paper trade before going live?

It depends on how quickly you gain proficiency, but a minimum of 3-6 months of consistent paper trading focused on executing a strategy is recommended before using real capital. This allows seeing how your system performs across diverse market conditions.

Can you make paper trading as realistic as possible?

Yes, take steps like trading with a realistic account balance, adding pretend commissions and slippage, not resetting losing trades, reviewing detailed statements, and more. Treat it like real money on the line. Small habits make a difference.

Does paper trading require high-tech trading platforms?

Not necessarily – you can paper trade through basic spreadsheet trackers, pen and paper, or journaling apps. But more robust paper trading software provides helpful tools, streaming data, order automation, and performance analysis that can accelerate learning.

Is paper trading completely useless since it’s not real money?

No, as long as you use it constructively, paper trading provides extremely useful experience without financial risk. It prepares you mentally, strategically, and technically for live markets. But results should still be validated with real capital.

Can you transfer profits from paper

Can you transfer profits from paper trading to a real account?

No, paper trading gains are imaginary and cannot be transferred to a real money account. The practice account is solely for building skills, not generating cash profits.

What should you paper trade if starting completely new?

Focus on highly liquid assets like large cap US stocks and ETFs if totally new to investing. Stick to basic buy and hold strategies. Practice core mechanics like orders, research, setting stop losses, before attempting advanced techniques.

What paper trading mistakes cause issues in live trading?

Trading unrealistically large position sizes, overleveraging, taking excessive risks, and veering from strategy frequently in paper trading can lead to issues with account management and reckless decisions when actual capital is on the line.

Should you practice trading stocks and options together?

Yes, combining stock and options paper trading helps prepare for constructing real-world positions with hedging and leverage. Just start small with basic covered calls and puts to grasp the unique mechanics and risks options introduce.

How do you trade penny stocks on paper trading platforms?

Most simulation software includes penny stocks under $5. Be sure to use limit orders when paper trading thinly traded microcaps since wide bid-ask spreads can lead to inaccurate fills with market orders. Always research before trading.

Can you paper trade Bitcoin and other cryptocurrencies?

Some paper trading sites support virtual crypto trading, including Investopedia Simulator and OptionsPlay. This allows practicing cryptocurrency price speculation and technical analysis without having to buy coins. Understand the unique volatility and risks before using actual capital.

Is it possible to paper trade forex?

Yes, many leading forex brokers offer demo accounts that replicate their live trading platforms using virtual money. This allows you to practice margin, leverage, and managing currency pairs before putting your capital at risk.

Can you automate or code paper trading systems?

Absolutely. Developing automated trading systems is a prime application for paper trading. Code and test algorithms on historical data before deploying with real money to verify efficacy. Be sure to still review and optimize regularly.

What other creative ways can you simulate trading?

  • Compete in stock games and virtual investing contests
  • Join paper trading clubs and forums to discuss strategies
  • Replay past market days and trade them again with perfect hindsight
  • Add fake audio, visuals, and haptic feedback to raise the stakes
  • Implement mental trading exercises by manually planning trades

Approach paper trading creatively and it can transform into a valuable immersive experience that accelerates expertise.

In summary, paper trading is an ideal way to practice trading and test strategies before putting your hard-earned capital on the line. Use this guide to start virtual trading and significantly boost your real-world investing skills and confidence.

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