Good practice is something that beginners in trading cannot overlook. It is quite popular among novices to go for a so-called paper trade. What is it exactly? Well, the paper trading is the simulation of the trading activity, which allows a trader buy and sell securities using virtual money. With the help of the paper trading, investors can sharpen their skills in trading financial markets by watching over simulated positions in the genuine-looking market environment.
The idea behind the paper trading is the ability to test new investment strategies, investigate the trading platforms, learn more about proper position sizing etc. However, these benefits exist only on the “paper”. There are some pitfalls that the paper trading has, which can be deadly especially for those who start out. In this article, we would like to explain the limits of paper trading.
Drawbacks of paper trading
First of all, the paper trading does not address the reality of emotions that investors have during live trading. When practicing, traders generally feel safe so they unconsciously understand that nothing bad can happen. They can intentionally make mistakes, risk a lot of capital and so on. This can backfire a lot in the real market, since traders might lack emotional discipline. They may not overcome the emotional impact of profits and losses. Hence, this can harmful for the trading career in the long run.
We should as well mention that the trade simulator does not take into account slippage and commissions that present an integral part of trading live on Forex markets. In the real trading environment, investors pay a lot of attention to designing the trading plan which includes maximum costs and other important aspects. Those who purely rely on the paper trading might find themselves in a very unpleasant situation. The reason is that virtual trading does not consider spread widening, hidden commissions and the problems with order execution that may lead to extra pips lost in the course of trading.
Trading strategies may not be as feasible as they used to be during the paper trade. As we have previously sad, many game-changing factors are taken out of an equation. When testing skills in the virtual trading using particular trading strategy, the investor may lose risk and money management out of sight. These elements, however, are key for survival in the financial markets. Beginners might have unrealistic expectations about the trading as of risk-free activity. This wrong perception can be exacerbated by the paper trading, so it is important to be cautious here.
The Bottom Line
Our purpose was not to say that the paper trading should be avoided or ignored by the traders. Conversely, we endorse practice as it is needed for gaining enough experience before starting live trading. However, it is still significant to consider the risks of the paper trading because it is not infallible. This means that the traders should have a serious attitude to virtual trading, as if they were making investment decisions in the real market conditions.