Trading is a very risky job to do, especially in the crypto space where volatility is on the high side. This makes it imperative for traders to know exactly what they are doing to prevent unnecessary losses.
To know what you’re doing in crypto trading, you need to practice for many years, or learn from someone better than you. The many years of practice still poses a problem if it requires you to trade using your money, as losses are unavoidable.
Traders therefore came up with a solution – a way to practice trading and test strategies without risking your actual funds. This solution is called paper trading. Paper trading provides a platform for new traders to perfect the art of trading before they get into real trades with their actual money.
In this guide, we discuss what paper trading is, how it works, the advantages and disadvantages. If you’re considering becoming a crypto trader, you need to read the guide to equip yourself for the task ahead.
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Imagine riding on a stationary bicycle for the purpose of exercise. The stationary bicycle has all the parts of a normal bicycle and works just like one. The only difference is that it is not actually moving, it only gives you the feeling of riding on a moving bicycle.
Since the bicycle isn’t actually moving, anyone can ride on it without facing the actual risk of falling from the bicycle if they don’t know how to ride. It is safe, and you don’t need to worry about falling, but you still have to ride it to get the benefits.
This is how paper trading works. A paper trading platform allows you to trade in a simulated environment that resembles a real crypto exchange. The only difference is that you use paper or pseudo money. This is money assigned to you for trading, but it isn’t real money.
Therefore when you carry out paper trading, you may lose just like in the case of a real trade. It is however not an actual loss because the money isn’t real. The platform only makes it real enough for you to learn, and the more you practice with it, the more you learn.
The idea is to keep simulating trades until you’re able to consistently make profit with the paper money rather than losing. That tells you that you’re ready to start trading profitably, and then you can start using your real money to trade.
Why Engage in Paper Trading?
There are several reasons why as an intending trader, you should try paper trading before you start live trading with your money. Fortunately, most crypto trading platforms offer beginners this opportunity. Here are some advantages you can derive from it.
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Test Market Strategies: You may have wonderful ideas of trading strategies to use in your head, but only by testing them can you verify if they’ll be profitable. Paper trading affords you the opportunity to do that.
Trade Without Risk: Paper trading is trading, only that it does not involve real risks. This allows you to freely make mistakes and learn from them without risking any real money. As such, it is an ideal environment for beginner traders to perfect their craft.
Boost Confidence: Since you’re trading without any real risks, you trade without fear, which builds your confidence in trading. This is important because being panicky can result in several mistakes that lead to avoidable losses.
Disadvantages of Paper Trading
While there are many advantages to using paper trading to practice, there are also a few disadvantages to it.
False Sense of Security: Since you’re not trading with real money or risks, you’re likely to be relaxed and not as vigilant as you would be in a real trade. This means you’ll still need to make adjustments when you start proper trading.
Does Not Reflect Real Costs of Trading: Real trades carry costs such as commissions and slippage that are not reflected in paper trading, which you’ll get to encounter when you start trading.
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