Learn Trading in Advance

What is Paper Trading? – How to Use Trading Simulator

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What is Paper Trading?

Paper trading lets you learn trading without losing money. In paper trading, you use a trading simulator instead of a real trading account to test different trading strategies.

Trading is a zero-sum game, which means you’re going to compete with professional traders who have skin in the game and are more experienced than you.

If you’re a novice trader, paper trading helps you to prevent losing money in the early steps of learning the game. Many professional traders suggest starting trading with paper trading then switch to real accounts.

In fact, You should have a clear understanding of how to use technical analysis for opening a trade with proper entry/exit, stop loss, profit target, risk/reward ratio, etc. before using real trading accounts.

Is Paper Trading Free?

Many brokers and trading websites give you a free or trial version of their trading accounts to paper trade with some virtual/fake money.

In this way, customers could paper trade with these trading simulators before opening a real trading account.

If you look at these virtual trading accounts from the business standpoint, actually they’re good for brokers or trading service providers. It enables people to test their trading platform, and if it makes them satisfied, they become a customer.

Paper trading accounts help brokers to decrease their marketing costs and increase their potential customers for the future.

Is Paper Trading Useful?

Like pilots who want to learn to fly a plane, traders need simulated trading accounts to learn to trade. Paper trading has many use cases, and we’ll discuss how you can use it to improve your trading results.

1. Paper Trade to Learn Trading

As we explained above, paper trading helps you understand the trader’s mindset before using real money which has the risk of losing capital.

Trading is a performance-based skill, and to improve your trade’s result; you should exercise enough on trading simulators. You should paper trade to enhance your trading skills and to understand which trading style is proper for you.

Understanding Trading psychology is very important for success. If you do demo trading, you’ll realize which kind of trades (day trading or scalp trading, swing trading, and position trading) are suitable for your psyche and what’s your risk tolerance.

2. Paper Trade to Test New Strategies

If you study any great trader success path, you realize they have a specific set of trading strategies, and they use them consistently on markets.

The condition of financial markets are always changing, and sometimes traders found themselves losing money despite using the same strategies.

Therefore, the Profitability of any trading system heavily depends on market momentum. Sometimes traders decide to learn new trading strategies to be profitable and earn money again.

Even professional traders using paper trading to test their new strategies and analyzing their outcomes, because they understand the inherent risks of financial markets. They don’t want to lose money on new trading strategies without precisely knowing if they’re working or not.

3. Paper Trade to Prevent Trading Account Drawdowns

Using simulated trading accounts to paper trade is very useful for avoiding from account drawdowns. Trading drawdown happens when you lose a massive amount of money in one trade, and your trading capital amount drops sharply.

Financial markets are dynamic, and their momentum changes over time. In order to prevent trading drawdowns, you must manage your risks better. When you are continuously losing money on trading, it’s a sign that one thing is not working well.

When these situations happen, the best solution is to paper trade instead of trading with real money.

So, You continue to use your trading strategies on trading simulators to understand why you consistently lose and whether if market conditions are changed or not.

In this way, paper trading helps you to gain your trading confidence once again and trading with real money doesn’t seem scary anymore.

4. Paper Trade to Understand Different Markets Behavior

Most of the successful traders are the ones who focus on specific markets. Every market has its own fundamentals which affect the price action of candlestick charts differently.

If you analyze the price action of candlestick charts for markets like Forex currencies, Commodities, Cryptocurrencies and bitcoin, Oil, CFDs, ETFs, penny stocks, etc. you’ll realize the market momentum and profit/loss potential is different on these markets.

In order to be profitable in any market, you should first paper trade them in simulated trading accounts. Virtual trading enables you to understand different markets dynamic and whether your trading strategies work on them or not.

Trading Simulator vs. Live Trading

Paper trading on simulated accounts have some differences with real accounts. Prices of some broker’s trading simulators have a delay in comparison to live markets. Therefore, You should pay attention to this point before practicing paper trading.

Some brokers and trading service providers don’t consider trading fees precisely on their simulated trading accounts. If you use scalping or day trading strategies, you should calculate the exact value of trading fees because it can affect your profitability in the long run.

Some traders think paper trading is not valuable because they believe you won’t feel the same emotions as you do with real money. But if you’re treating the virtual trading as your test before you go live in the market, you will feel similar emotions.

You should prepare your mind for winning in demo trading and if you lose you should take it seriously. It’s better for you to have a trading journal and write your trades statistics according to these metrics:

  • Win ratio
  • Payoff ratio
  • Commission ratio
  • Largest winning trade
  • Largest losing trade
  • Average winning trade
  • Average losing trade
  • Average % of drawdown
  • Total % of profit / loss

It’s essential for you to fill out a paper trading journal. Because it enables you to have the proper statistics to know whether your trading strategies make you earn money or lose money in the end.

Paper Trading vs. Backtesting Trading Strategies

When you want to know whether your trading strategies work or not you should test it before using real money.

Some people consider paper trading and forward testing as the same which are opposite of backtesting.

If you examine your trading strategies on historical data, it’s called backtesting, and if you test them on live markets, it’s called paper trading or forward testing.

Some strategies are causing you serious problems whenever you want to backtest them. In order to test new strategies on live markets without losing any money, it’s better to test them on simulated trading accounts.

By writing down your paper trade results, you’ll know with higher probability about outcomes of your trading strategies.

What is The Best Paper Trading Site or App?

It’s hard to choose the best paper trading website or app, and it depends on many factors. But, if you consider ease of use, accessibility to every market and proper trading tools, then the best choice would be Tradingview.

Paper trading on Tradingview is free and accessible for everybody with a simple sign up. You can use multiple indicator and tools to open a paper trade position. Also, you can analyze your performance with accurate data and taking notes at the same time.

There is no worry about accessing any market and index in Tradingview, and you can paper trade all of them without any problem. In the list below, you’ll find some of the most popular markets for paper trading:

  • Paper trade Forex on Tradingview (EURUSD, GBPUSD, AUDUSD, USDJPY, AUDJPY, etc.)
  • Paper trade bitcoin and cryptocurrencies for any exchange’s charts like Binance, Bitmex, Bitstamp, Bitfinex, etc. on Tradingview  (BTCUSD, BTCUSDT, ETHBTC, ETHUSDT, XRPBTC, ADABTC, etc. )
  • Paper trade stocks on Tradingview (AAPL, FB, AMZN, NFLX, GOOGL, etc.)
  • Paper trade indexes on Tradingview (SPX, NDX, DJI, DEU30, NI225, UKX, etc.)
  • Paper trade commodities (Metals, Energy, Livestock and Meat, and Agricultural) on Tradingview (USOIL, XAUUSD, XAGUSD, NTGUSD, etc. )

Paper Trading Guide for Tradingview

In the example below, you can quickly learn paper trading on Tradingview.

Tradingview website gives you $ 100000 paper money to trade on any market. We want to paper trade bitcoin on the Bitfinex exchange’s chart on the Tradingview.  So we have two choices for opening a paper trade position.

  1. We can right click on the page and choose trade then click on “create new order
  2. We can left-click on “paper trading” tab in the blow of the page.
opening a paper trading position on the Tradingview
opening a paper trading position on the Tradingview

We want to buy one unit of bitcoin at the market price ($ 3513)  and sell it at $ 3624 to profit on this long position. in order to manage our risk appropriately, we put a stop loss at the $ 3489 so if the price doesn’t move in our favor we prevent from further losses.

After we opened the “paper trading” section of the website, we can easily put our order just like the below image:

paper trading features on the Tradingview
paper trading features on the Tradingview

So when our order executed at the market price, we can see our entry price, stop loss, and take profit price levels on the chart. We can easily modify our order take profit or stop loss prices from the paper trading tab.

Modifying a paper trading position on the Tradingview
Modifying a paper trading position on the Tradingview
1 Comment
  1. erotik says

    Hello. This post was extremely remarkable, especially since I was looking for thoughts on this issue last couple of days. Leanna Levin Chevy

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