What is ‘waste’?
Paper manufacturing simulation of trade that allows investors to practice buying and selling securities without the involvement of real money. While a paper trade can be done by simply tracking the 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 investors of all levels can hone their trading skills.
Breaking down ‘waste’
The proliferation of online trading platforms has increased the ease and popularity of paper trading without the participation of real capital. Another benefit of paper trading is that it can be used to test a new investment strategy before to apply this strategy on a live account. To derive maximum benefit from paper trading and investment decisions and transactions must be based on the same risk-return objectives, constraints, investment and trade of the horizon, as if it were a real account used. For example, little sense to risk of the investor to paper trade exactly the same way as a day trader and make numerous short term trades. Online brokers such as Scottrade, fidelity and TD Ameritrade to offer clients a paper trading account. Questions answers offers a free stock simulator which you can use to paper trade.
Paper trade to test the order types and market conditions
Investors and traders who want to paper trade should be familiar with the different types of order, such as stop orders, limit and market. The paper should arise in different market conditions; transactions placed on the market, characterized by high levels of market volatility may lead to increased costs slippage due to the wide spread compared to the market that moves orderly manner.
Paper trading account and real account
Paper trade can give novice investors or traders an impression that trade is relatively simple, giving a false sense of security that often leads to distorted investment. This is because paper trading does not involve the risk of real, genuine capital, and principal investment strategies such as buy cheap and sell expensive, which are difficult to adhere to in real life, is relatively easy to achieve with paper trade.
Paper Trading Psychology
Investors and traders are likely to show different emotions and judgments when risking real money, what would cause them to act irrationally when working on a real account. For example, consider a real trade with a new foreign exchange (Forex) trader who enters a long position in the Euro against the U.S. dollar ahead of the employment data. If the data are much better than expected, and the Euro falls sharply, the trader can double in an attempt to compensate for the loss, as opposed to take a loss, if it was a paper trade as no real capital was lost.