Trading stocks can be complicated and confusing when you are just getting started. With proper planning, many online traders are able to make money from the comfort of their own home. Before getting into the stock market, experts suggest to start with paper trading.
In this article, we will tell you what is paper trading and what the steps followed in paper trading.
Paper trading is an exercise in which you buy stock virtually, that is in your head or on a spreadsheet without committing real money.
You need to simulate trade by buying and selling in your head or on a paper without risking real money.
In simple words, investors or traders who wanted to practice would write down their buying and selling of stocks on paper, rather than placing actual orders at a brokerage and follow the market movement to know how their strategy is working.
This is why paper trading is also known as virtual stock trading to backtest your trading strategy.
Steps you can follow in paper trading strategy
Beginners can practice making or losing money before actually getting into the real stock market.
If you are already in the stock market as an investor or trader, then new strategy can be practiced through paper trading techniques to test whether or not your strategy is working. In this way, you can test your new strategy before employing it in your live account.
Here are simple steps followed in virtual stock trading to test buying and selling strategy;
- Write down the amount you want to invest in the stock market in a paper.
- When you find the right stock to trade or invest, then pretend to buy some shares out of the investment you want to make. You can pretend to be buying more than one stock. But, write down the price, quantity and date on which you bought and what is the reason for buying.
- Find out the commission and other charges applicable for the quantity you bought. Write that on the paper with proper break-up.
- Keep writing its price movement on a daily basis if you want to invest for a short or long-term.
- When the time period ends, review your virtual purchase to know how did you do? If your stock rises, find out if it moves as expected by you. If it fell, are you able to figure out why?
- Continue this practice for a while until you are ready to buy real stocks. If you are losing money regularly on paper, then rethink your strategy.
Before getting into the real market, don’t forget to do your own research by using fundamental analysis techniques.
Many online platforms are providing virtual trading facilities to simulate your techniques instead of working on a paper. You can also use those platforms.
Key benefits of virtual stock trading
Here are few benefits of virtual stock trading technique;
- It costs nothing.
- It allows you to know the flaws in your strategy.
- By practicing on paper, you learn how to invest or trade.
- You get confidence.
One of the biggest problems with paper trading is begineers are not emotionally attached to it as there is no real money involved.
However, it’s a very good way to start before risking real money.
