Problems with paper trade

paper trade

A paper trade is a simulated trade in which investors practice buying and selling without risking real money. Investors who wanted to practice would write their investment ideas on paper and follow the market movements, to see if their ideas panned out. It is used to test a new investment strategy before employing it in a live account. To get the most benefits from paper trading, an investment decision and the placing of trades should follow real trading practices and objectives. It is a very successful strategy for beginners to learn stock market movements without losing money.  Though paper trading is an effective way to learn to trade, I am gonna tell you some facts that are that might not be true about it.

Market Correlation

Paper trading does not address the broad market’s impact on individual securities. The majority of equities move in lockstep with major indices during periods of high correlation, which is common when the Market Volatility Index (VIX) rises. While results may look incredible on paper, more extensive conditions may have made the outcomes, instead of the ideals or entanglements of the individual position.

Emotions

Paper trading doesn’t address real-world emotions created by real profits or misfortunes. In reality, many traders cut profits short and let losses run because they lack market discipline. Those reckless estimations don’t become an integral factor when managing theoretical numbers.

Slippage and Commissions

Slippage is the difference between the price you expect and what you get. It’s the cost of trading. This is exacerbated by wide spreads that are poorly captured in most paper trading techniques.

Paper trading is great when you start first, but as you grow it is important to add life to the game.