What is paper trading?
Before using your capital to open a position, it’s important to know how to navigate the financial markets. ‘Paper trading’ is one of the methods you can use do this. Let’s explore paper trading in more detail.
Paper trading enables traders to simulate opening and closing positions without risking any capital. It can be described as ‘practice trading’ or ‘hypothetical trading’, as the trader runs through (and records) every step of the trade without actually placing it.
For example, imagine you do some analysis and decide the price of the FTSE 100 might go down. You then hypothesise your trade as follows: ‘Based on my analysis, I believe the FTSE 100 will decline, and I would have opened a short position by selling two CFDs (each equivalent to £10) when the market reached 6199.5.’
You can then monitor the trade and see how it would have played out. Let’s say you were right – the FTSE 100 fell to 6120.5 and you decided this is when you would have closed your position and taken your profit. In this case, you would have made £1580, calculated as the opening price (6199.5) minus the closing price (6120.5), multiplied by the contract value (2 x £10).
If your prediction was wrong, and the market went up, you would have made a loss.
See more examples of CFD trading and spread betting
Paper trading is not only useful to beginners, but also to those who have been exposed to the financial markets. The aim is to learn more about the process of trading, to try new things and to see whether positions have merit.
How traders choose to approach paper trading depends on their experience. Some may start by writing down a potential trade and then seeing how the market plays out – noting what the profit or loss may have been. Others may want to take a more ‘lifelike’ approach by using a paper trading account to master the basic strategies.
What is a paper trading account?
A paper trading account – also called a demo account – is an account that you can use to practise your trades. Demo accounts offer the same functionality as a live trading account; the only difference is that you don’t risk any of your capital.
Today’s paper trading accounts are very advanced, accurately simulating the live trading environment. Some even enable you to add drawings and indicators to your charts so that you can assess the technical merits of the trade. This can help you gauge volatility levels of different underlying markets and decide if they match your risk appetite.
IG’s demo account gives you this and more. You can trade over 17,000 financial markets – such as shares, forex, indices and cryptocurrencies – without risking your capital. And, the account has £10,000 in virtual funds to get you started. You can open your demo account in just a few minutes.
Benefits of paper trading
- You don’t use real capital, which means there is zero risk
- It gives you the opportunity to build a trading plan using your own market experience
- You’ll have a collection of tried and tested strategies
- There is plenty of room for failure – and learning
- It eliminates the stress and other psychological factors, such as greed, from trading
- It builds confidence to trade live markets
- You’ll gain plenty of experience in preparation, trading and analysis
Create an IG demo account today and enjoy the benefits of learning how to trade without risking your capital.
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