Paper trading is a controversial subject among traders. There is a great divide of opinions on the subject. Some people view it as a great way to develop your edge in the market without putting your capital to risk. Others view it as a waste of time due to the unrealistic environment it puts you in. Here are some pros and cons of paper trading stocks.
Allows You to Explore Different Strategies
You don’t want to jump into trading without having a strategy that you know has an edge. Paper trading allows you to explore and test strategies, and finds what works best for you. It allows you to find and optimize your strategy without you losing a bunch of money in the experimentation process.
Preserves Your Capital
There is a long learning curve to trading mastery. This learning curve will usually involve you losing a decent amount of money as you perfect your strategy, learn risk management, and learn how to make decisions under pressure. Paper trading will allow you to lose less money in the learning curve phase, and allow you to get your risk management down without wasting money.
Familiarizes You With the Motions
I am sure the first time you looked at a charting and trading platform you felt overwhelmed. Paper trading allows to get familiar with the mechanics of trading (placing orders, stop losses, getting familiar with your charting platform, ect.), without losing a lot of money on simple mistakes like buying shares when you meant to sell.
The emotions of trading real money are completely different then trading in a simulator. We have seen numerous students have a ton of success in the simulator, and then be unable to replicate it with real capital. It's a lot easier to make the right trading decsion when you have no skin in the game. Trading 1000 shares in the simulator is the same as trading 100,000 shares. The stock drops 50 cents and you see yourself down $50,000 unrealized, you feel nothing. You will never feel fear when you paper trade.
Unrealistic Order Fills
Since you're not actually participating in the market in a simulator, you will fill all of your orders instantly with any size. You cannot fill 10k shares of stock at one price that only trades 100k shares a day. You will not experience slippage, and may cause you to inappropriately size your positions when you start trading live.
May Develop Bad Habits
When you're trading in a simulator it is easy to get into bad habits because you're not getting punished for bad behavior. It's easy to average down and not respect your stop losses because you're not losing any money. People don’t usually learn from their mistakes unless they're punished in some way, and paper trading has no consequences for bad trading habits.
Paper trading does have value for new traders. However, it should not be done for too long. Once you learn the basics, develop your strategy, get a few green weeks in the simulator, you should move to trading live with small size. It seems so easy when you're paper trading, but when you have skin in the game everything changes.
If you want some direct feedback on where you are as a trader and your trading goals, you should take our free trader assessment for advice on how to take your trading to the level. We will also direct you to our free webinar "How to make $200 a Day Trading" to give you even more free insight on how to achieve consistency in trading.