Paper Trade

DEFINITION of 'Paper Trade'

Using simulated trading to practice buying and selling securities without actual money being involved. While a paper trade can be done by simply keeping track of hypothetical trading positions, it usually involves the use of a stock market simulator that has the look and feel of an actual stock market where budding investors can hone their trading skills. The proliferation of online trading platforms has made it easy to practice paper trading without committing actual capital. Another benefit of a paper trade is that it can be used to test a new investment strategy before putting new money into it.

BREAKING DOWN 'Paper Trade'

To derive the most benefit from paper trading, it should be taken seriously, with investment decisions made based on the same risk-return objectives, investment constraints and trading horizon as in real life. So, for example, if you are a risk-averse individual, it would make little sense to paper trade like a day trader and make dozens of very short-term trades.

Paper trading may also give novice investors or traders the impression that trading is quite easy, and lull them into a false sense of security. This is because paper trading does not involve putting one’s hard-earned money on the line. As a result, basic investment strategies such as buying low and selling high – which are quite difficult to adhere to in real life – appear relatively easy to make while paper trading. The first lesson of paper trading, therefore, is that while it is a great practice tool, it is very different from actual trading with real money.

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