Here’s a fact. Penny stock trading is a high-risk high-reward venture. You would need clear trading strategies and strict stop-loss set in place if you want to make consistent profits.
However, there is a learning curve involved before you can become a successful trader. So, how can you learn about practical aspects of penny stock trading without losing your hard earned money during the process?
The answer is – paper trading. If you are a newbie to penny stock trading, or you are someone who has had a string of losses in trading, paper trading can be immensely helpful for you.
What is Paper Trading?
Paper trading, also called “virtual stock trading”, is basically a simulated trading process. In paper trading, investors will be able to ‘practice’ investing without using real money.
Paper trading can save you from some painful educational moments of the stock trading. You can also use it for working out the kinks and flaws in any new trading strategy that you are working on.
Benefits of Paper Trading
There are many benefits to paper trading.
- Zero Risk: Since paper trading doesn’t cost you anything, you will not lose money due to wrong timing or poor decisions in trading. Paper trading also helps in understanding the flaws of your trading or analysis process and help you fine-tune, refine, or even redo the whole strategy.
- Zero Stress: Trading brings in two emotions to the forefront – fear and greed. This emotional roller coaster prevents users from focusing on building the key trading strategies and identifying the ideal risk management levels. Instead, the focus shifts to making profits and pitfalls. This can be avoided using paper trading, as it involves zero stress of losing money.
- Practice: Paper trading takes a trader through all aspects of the trading process – right from pre-market preparation to existing trades and taking profit or losses. The shortcut keys and layout of the trading software can also be learned via paper trading. This way, when the trading is done with actual money, the navigation would be quick and easy.
- Builds Confidence: Paper trading can help in building confidence in trading, as you would be making a series of complex decisions instantly and making hypothetical money.
Word Of Caution About Paper Trading
Paper trading has a plethora of advantages. However, there are also certain disadvantages.
- Hidden Charges: There are many hidden charges associated with trading. This is not covered in paper trading. The actual profit could be lower than estimated, so a refining in the trading technique or entry and exit criteria may be required for getting the actually expected profits.
- Not Real-World Emotions: Paper trading can help in understanding the working of trading. However, the actual emotional connect when making profits or encountering losses may be missing.
Algorithmic Trading: There are a lot of obstacles in real-world trading caused by computer-driven algorithmic trading. Many time, technically sound positions get stopped out due to algorithmic trading. This real-world experience would be missing in the case of paper trading.