The post Can Paper Trading Offer Accurate Results? by Sarah Edwards appeared first on Benzinga. Visit Benzinga to get more great content like this.
SHORT ANSWER: Paper trading can offer valuable insights and practice but it may not always accurately reflect real world trading conditions and outcomes.
Remember the training wheels you had on your bike? On the one hand, they made learning to ride on your own easier. But on the other hand, they could never replicate the experience of riding without them.
Paper trading works the same way. It provides a demo mode during which you can practice real-world trades.
Is paper trading free? Yes, in the sense that it provides practice without risking actual dollars. But does it actually offer results that reflect the real-world market? This article explores that question.
The best way to learn about stocks and investing is through an investment platform. The right tools can help you research and monitor every investment to help maximize every dollar.
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Is Paper Trading Accurate?
A paper trading platform offers simulated conditions designed to help investors learn the basics of the market and sharpen their trading skills. But while these tools are designed to reproduce the conditions of the market, paper trades are rarely fully accurate.
Reasons Paper Trading May Be Less than Accurate
A stock market simulator can be a valuable tool, especially for beginners. But paper trading doesn’t provide the accuracy of the real-world market. Why not?
1. View of the Stock Market Can Be Unrealistic
Even the most advanced paper trading platform can’t replicate the actual conditions of the stock market. For instance, demo platforms can’t accurately portray the relationship between broad market conditions on individual stock prices, which can give investors a false impression of market volatility.
2. Simulated Fill Prices May Not Accurately Reflect Real-World Conditions
A stock simulator can’t always account for industry trends or economic realities that alter the price of individual stocks. As a result, investors may be practicing with prices that don’t correspond to the behavior of their real-life counterparts.
3. Emotions Associated with Live Trading Are Not Involved
Is paper trading free? Yes — and that’s often its greatest shortcoming.
Even the military uses live ammunition when training for combat. When investors have no skin in the game, a simulated environment won’t develop the same discipline that comes when actual dollars are at stake.
4. True Cost of Trading Is Not Simulated
Paper trades rarely capture the hidden costs of slippage and commissions.
Slippage is the difference between the expected price of a trade and the actual price when the trade is executed. And depending on your brokerage account, you could face commissions and other trading fees that drive up the cost of each trade.
Strategies to Make Paper Trading as Accurate as Possible
Despite these shortcomings, paper trading is a valuable way to hone your trading strategies. Here’s how to improve the accuracy of your paper trades.
1. Simulate the Real Market
Start by finding a paper trading account that offers the same features and functions as a real trading account. Look for simulators that duplicate the market volatility index (VIX) or monitor industry trends.
2. Be Disciplined When Paper Trading
In the back of your mind, you’ll always be aware that a paper trade isn’t the real thing. But for now, try to pretend that it is. Keep a journal of your trades and their results, and remind yourself that soon these numbers will apply to your actual money.
3. Use More Up-to-Date and Accurate Data
Never use a stock market simulator that isn’t regularly updated with accurate, real-world data. That way, when you transition to a standard trading account, you’ll be dealing with the kinds of conditions you’ve prepared for.
4. Pay Attention to the Fees Associated with Every Trade
Your brokerage account comes with trading commissions and maintenance fees that will influence every trade. Make sure you account for these fees when making your trades so you’ll know what to expect once you start trading.
5. Keep a Detailed Record of Your Paper Trading Results
Keeping a record of your paper trades can help you track your progress and discover which trading strategies work best for your goals.
How to Measure the Accuracy of Your Paper Trading
How do you know how accurate paper trading methods are? Here are a few basic tips.
1. Understand the Concept of Risk-Adjusted Return
Risk-adjusted returns measures performance relative to the amount of risk taken. That means you’ll need to weigh the risks associated with your trades against the amount you’re getting back.
Keep in mind that you may be more risk-averse in the real world than in the simulated world of paper trades. As such, you’ll want to develop discipline as you learn the ropes of trading.
2. Compare the Performance of Your Portfolio and Other Portfolios in the Same Asset Class
You can also gauge your accuracy by comparing your portfolio to others in the same asset classes. Many brokerage platforms offer community features that let you compare notes with other investors, allowing you to discover new investing strategies and check your progress against other industry-specific benchmarks.
Compare the Best Online Brokers That Offer Paper Trading
Ready to try your hand at paper trading? Take a look at Benzinga’s roundup of the best online brokers that allow paper trading for beginners.
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get started
securely through Interactive Brokers’s
website
Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 150 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.
IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR’s offerings.
Best For
- Access to international markets
- Active traders
- Detailed mobile app that makes trading simple
- Wide range of available account types and tradeable assets
- IB SmartRouting provides significant price improvement vs. industry
- Fractional trading allows investing regardless of share price
- Industry’s lowest margin rates
- Earn more by lending your fuly-paid shares
- Beginner investors might prefer a broker that offers a bit more hand-holding and educational resources
get started
securely through public.com’s
website
Public is the only investing platform that lets you trade stocks, ETFs, crypto, bonds, options and alternative assets—like fine art and collectibles—all in one place. Public also provides access to custom company metrics, live shows about the markets, and insights from a community of millions of investors, creators, and analysts.
Today, Public provides more ways to create a diversified portfolio than nearly any other online broker. Members can engage in sophisticated investing strategies and access a wealth of investing insights—from company-specific analysis to live audio shows and town hall-style Q&As. In addition, Public offers a premium membership tier with unique company KPIs, detailed performance metrics, and institutional-grade research.
Best For
- Stock and ETF investors
- Crypto investors
- Investors looking to diversify with alternative assets or bonds and options
- Commission-free stock and ETF trading
- Fractional share investing
- Advanced data, tools, and insights with Public Premium
- You can’t transfer crypto to another wallet
- No mutual funds or precious metals
- At this time, only offers individual brokerage accounts and not IRAs
get started
securely through Robinhood’s
website
Robinhood is a popular trading platform known for its commission-free trades and user-friendly mobile app. Ideal for novice investors, Robinhood makes it easy to buy and sell stocks, ETFs and cryptocurrencies. The platform offers a straightforward, no-frills experience, making it accessible for users new to investing. With features like fractional shares and a sleek interface, Robinhood lowers the barriers to entry for investing, allowing users to start with just a few dollars. It lacks the advanced tools and research options that more experienced investors might seek. Overall, Robinhood is a great choice for beginners seeking a simple way to invest.
Best For
- Beginners looking for simplicity
- Mobile-first investors
- Commission-free trades
- User-friendly mobile app
- Instant double
- Cash management
- Access to cryptocurrencies
- Limited research tools
- No mutual funds available
- Basic customer support options
get started
securely through TradeZero’s
website
TradeZero is an online broker and free stock trading platform that provides everything you need to successfully share and trade, including round-the-clock customer support. TradeZero provides four different trading state-of-the-art software programs with its services, a locator for sourcing shares for shorting, commission-free trades, and real-time streaming, to name a few of the features promoted on their website. The software is a unique and (potentially) affordable option for anyone interested in stock trading.
Best For
- Traders seeking high transparency and mobility in a stock trading program
- Those attracted to commission-free trades
- Those seeking a free version of a high-quality trading program
- 24/7 live customer support
- Uses ZeroWeb technology, a powerful level 2 online platform with direct market access
- Mobile app allows users to access stocks and trade in real-time while on the go
- Enforces Pattern Day Trading restrictions (accounts need to maintain a daily equity balance of at least $25k)
- Mobile app could offer more features
get started
securely through eToro’s
website
eToro is a leading trading and investing platform that’s recognized for its stock and crypto broker services. Its standout feature, copy-trading, allows users to reproduce the trades of other investors on the platform. In addition to stocks and cryptocurrencies, eToro provides Smart Portfolios — diversified portfolios of crypto assets managed by eToro.
The platform is regulated by regulatory authorities such as the FCA, SEC, ASIC and CySEC, ensuring a level of trust and security for users. While eToro boasts a user-friendly web and mobile platform, it has limited customizability and lean educational and research offerings. Overall, eToro provides a convenient and regulated platform for social trading and investment.
Best For
- Investors who want to follow and copy other traders
- Investors who want to trade crypto, stocks and options on the same platform
- Beginners who want to invest in stocks and ETFs with zero commissions and copy-trading features
- Commission-free stocks and ETFs trading
- Innovative social investing platform with CopyTrader feature
- Access to a wide range of cryptocurrencies, stocks and ETFs
- Free virtual trading account and digital wallet
- High spreads for buying and selling crypto assets
- Contracts for difference (CFDs) unavailable inside the U.S.
The Enduring Value of Paper Trades
Is paper trading free? Your brokerage account may charge a fee to maintain membership, but once you’re using the platform, all your trades will take place with simulated dollars.
Stock market simulators will always play a role in helping investors sharpen their trading skills. In fact, novice traders should begin their journey with a paper trading platform before making their way to real-world trades.
While they don’t deliver spotless accuracy, users can still find ways to employ these tools to simulate real-world conditions and become better investors.
Frequently Asked Questions
How similar is paper trading to real trading?
The realism element can be hard to quantify, but the best paper trading platforms will attempt to simulate actual market conditions using up-to-date information and include all the features of a traditional trading account.
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Is paper trading smart?
Getting your start with paper trading is a wise strategy. Beginning investors should aim to spend six months or more performing paper trades before graduating to a real trading account. Even seasoned investors can use paper trades to sharpen their skills and test new strategies.
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What are the benefits of paper trading?
Paper trading allows you to experiment with different trading strategies without risking actual money, which lets you quickly learn new skills and become a better investor.
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The post Can Paper Trading Offer Accurate Results? by Sarah Edwards appeared first on Benzinga. Visit Benzinga to get more great content like this.