The modern-day stock trading is a popular medium of investment. Today almost everyone has put their money in the stock market, out of which some have created new assets, while many have randomly invested and have thus lost their money.
Many people associate trading with gambling but that’s a wrong approach, trading is a more calculated research-based investment where various factors are studied before making any transaction. The right kind of investments can help you make huge profits. Thus, amateur investors must improve their investment skills and strategy making the ability to maximize their profits and avoid losses.
However, the major question is how can the new investors test their trading strategies without risking their money. Well! The answer is through Paper trading.
What Is Paper Trading?
Paper trading is also known as virtual stock trading is the best platform for all new investors to practice their strategies and implement them without risking any real money. Here, you can hypothetically trade, with some virtual money, however, the best thing is that here the behavior of stocks is very similar to the real stock trading environment. So before putting your actual money, through paper trading, you can get a trial run of your trading skills and see if you are good at it.
How To Start Paper trading?
Primarily there are six steps involved in Paper trading. Each of these steps is necessary and once to are a pro in paper trading and are ready to enter the real trading environment, even then follow these steps.
- Decide the amount of money you want to invest and write that down in your investment dairy.
- Research on the stocks you wish to invests. In stock trading, research is the key, you need to study the product where you are putting your money. Once you have decided, write down the names of the stocks.
- Now based on the current market condition, decide the amount of money that you want to invest against each stock. In trading, you must never put all your money in one single stock, wisely distributing money between various stocks is the right method.
- The next step is to divide the investment amongst the stocks you want to purchase. For instance, if your total investment amount is $2000 and you are planning to buy 5 stocks then the money invested on an average in each stock is $400.
- Now you can start virtually trading, but it is important to have a stop-loss order in the market and have a clear understanding of how and when you wish to exit. A “stop-loss” is a price set on a given investment that creates an automatic sell.
- Adapt the habit of writing down each order. When you hit the exit by registering a profit or loss, you will get a clear understanding of how to strategize your trades. After a couple of virtual trades, you will become an expert trader and with more knowledge and confidence, jump into the world of real trading.
Although Paper trading is risk-free trading, there are few limitations that you must be aware of. We have listed them below.
- It lacks the emotions that are involved in real trading. When you trade with your own money, the adrenal rush and the tension is very different compared to virtual trading. Therefore a lot of irresponsible trading can be seen amongst traders in Paper trading process.
- Also, Paper trading does not address the impact of market fluctuations on individual securities.
- There are a lot of hidden charges involved in real trading. These slippages are not a part of paper trading, thus it comes as a shock for the amateur traders when they start investing in real stocks.
Although paper trading comes with a lot of limitations, we cannot deny the fact that it is an important tool that can serve as a strong orientation on trading for new traders. If used properly, Paper trading can prove as an excellent opportunity to gain insights into the real trading world.
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