You have likely come across the terms “paper trading” and “live trading” a lot on Aikido finance. But, what do they mean? How do they work? We’ll answer all these questions (and more) in this article.
Let’s get started
What is paper trading?
Paper trading is a practice that lets investors practice buying and selling stock without risking real money. The term is a remnant from earlier (before online trading platforms gained widespread popularity) when aspiring traders would practice on paper before putting their money into live markets. The trader would have to record all trades by hand to track hypothetical trading portfolios, positions, and profits or losses. Things have changed a lot since then. Today, most practice trading happens within an electronic stock markets simulator. Which functions a lot like a real-world trading platform?
Let’s look at the key benefits of paper trading and how it helps you grow as an investor.
Paper trading costs nothing, so you won’t lose money if you have poor timing or make bad choices. it allows you to identify all the problems with your analytical process so you can improve.
It’s less stressful
Real-world trading will make you feel greed and fear, so much so that it will often blind you to crucial information you would need for proper risk management. Paper trading allows you to make rational decisions since you aren’t dealing with real money. It will enable you to focus on the mathematical process.
You’ll gain helpful insights into all aspects of the trading process, from pre-market preparations to loss taking and final profits. the broker simulator will show you how to use actual money software in a safe environment where the wrong keystroke wouldn’t trigger a financial catastrophe.
Paper trading does not address interactions between the broader market and individual securities. Equities will mirror major indices during high correlation periods. It often happens when the Market Volatility Index Rises. This means your results may be the result of broader market conditions, not the strengths (or shortcomings) of your individual position.
Paper trading cannot fully evoke the real-world emotions that result from profit or loss.
Commissions and slippage
Paper trading does not teach you to handle the hidden costs of commissions and slippage. This problem is compounded by the fact that paper trading techniques are ineffective at capturing wide spreads.
What Live trading?
Live trading is strategy stock traders use to capitalize on daily price fluctuations. Unlike paper trading, it happens in the real world and involves real money.
The most apparent benefit of live trading is that it is profitable. You can make an infinite number of trades with real stocks and take control of your financial future. You can make highly good sales and purchases at the click of a mouse. Assuming that you make the right decisions, stock market trading will make you money from your very first day.
Buying real stocks earns you dividends. Your stocks may not make rapid gains, but they will earn rewards. So, even if a particular store does not gain value, you will make profits over time. Besides offering returns, dividends can lower stock volatility and support your eligibility for tax benefits.
Live trading gives you complete control over your stock. It gives you the power to implement your own decisions without relying on a broker’s judgment. You’re free to make any decision you wish.
Live trading can be stressful
According to business insider, it is the second most strenuous job on Wall Street. It’s not that surprising. Real-world trading requires that you make several fast decisions each day, with minimal room for error. This kind of environment can have detrimental effects on your health. That’s why it’s important to use a quantitative approach, to outsource your decision-making to a model. You shouldn’t be day-trading on emotions, but rather be following a specific strategy. You should be able to describe what you are doing as a process.
Live trading may cause addiction
Some forms of live trading can lead to addiction. Every time you make a profit or get excited about a possible profit, your brain releases feel-good chemicals like serotonin and dopamine. You may come to rely on this kind of stimulation for pleasure as time passes. Your brain may be conditioned to want to trade financial instruments for euphoria, excitement, and wellbeing.
Paper trading vs. live trading
Paper trading is a great way to familiarize yourself with how the stock market works. However, it may provide a false sense of security. It does not conform with the actual market because it lacks the risk that comes with real money.
Ultimately all your paper trading efforts should prepare you for the move into live trading. As long as you operate cautiously, taking note of your failures and successes, live trading should be a profitable venture. Whether you’re a professional trader or an amateur, starting with a paper trading account then switching to live trading will provide immeasurable benefits.
We’ve covered the most important differences between live trading and paper trading, along with the benefits and drawbacks of each approach. Did we answer all your questions? is there more you’d like to know? Please reach out. We’ll be glad to help. Sign up to the Aikido finance for more.