Is Paper Trading Beneficial Before Actual Trading?

Paper trading is a popular tactic among people looking to start trading. The term paper trading is used to describe trading fake money, often from demo accounts. These accounts allow people to perform all types of trades or buying and selling just like in real accounts. In this article I will discuss pros and cons and places you can trade to answer the question, is paper trading beneficial before actual trading?

Pros of Paper Trading

The first pro of paper trading is not having to risk any of your hard earned money! This is an obvious pro to it, but it is certainly the most valuable one. When you first begin trading, you are going to make a lot of mistakes. These mistakes won’t just be reading a chart wrong and predicting a stock will go up just for it to go down. You will pick options contracts with the wrong expiration date, pick the wrong ticker than you were looking at, or buy 1 contract when you meant to buy 10. Paper trading makes all these problems almost nonexistent. At the worst, you lose maybe $200 from your account full of fake money, that you can just manually replace.

The second pro of paper trading is you have no stress. As I said before, when a mistake is made, your not losing any money literally. In real trading, you have to either find more money elsewhere or try to make your money back in other trade. This can lead to money chasing, which never ends well. With no added stress, you can always keep a level head and focus on your next trade, not your past trade.

The third pro is the amount of practice and confidence you will gain from paper trading. If you follow an established strategy and see success from it over time, you won’t have to lose any money from the trial and error once you start real trading. This kind of confidence right off the bat helps a lot. Trading can lead to a lot of self-questioning, especially if you see red early.

Cons of Paper Trading

A major con of paper trading is how it doesn’t set you up for the emotional reality of paper trading. Even though it was a pro before, knowing you aren’t losing actual money can make you comfortable. No matter how much paper trading you do you will never be prepared for when you go down big. The chances of this happening are very likely. This also plays on the other side as well though. If you have tons of successful trades, your ego may go through the roof and you will think nothing can go wrong. Then, things go very wrong

Another con is how paper trading platforms don’t properly account for commissions and bad spreads. A spread is the difference between the bid and ask of a position. Usually there is about a $1-$2 difference, but sometimes it can be almost $10. When you sell your position, your profit usually takes a hit from the amount of the spread. If you tack this on to a commission of usually $0.50, your profit undergoes a significant amount of slippage.

The last con of paper trading is people usually trade with an amount they don’t actually have. One of my largest realizations since I started investing is that if you have a lot of money, it is very easy to make a lot of money. Most people will practice trading with $10,000 or $50,000. But when they go to actually trade, they only use $1,000. The types of trades you will most likely take with $1,000 are much different than with $50,000. If they aren’t different, you will have a much smaller margin of error.

Now to answer the question of the day, is paper trading beneficial before actual trading?

Final Thoughts

My opinion on this may be biased, but despite the quality pros of paper trading, I don’t believe it is that beneficial. I never paper traded when I started, and I believe I made it out just fine. However, I am a person who likes to learn from doing, and from trial and error. I also feel like there is a DRASTIC difference in the emotional feel. Although, if you are not this kind of person, you should probably paper trade.

When I want to try out new trading strategies, I paper trade them. I recently paper traded a Calendar Spread, and it worked out exactly how I wanted it to. But, my immediate thought was, “Why didn’t I just actually do this, I would’ve made so much money!” This is something you just have to live with though, because I would not have had the same reaction if I had lost my money.