What is paper trading?
Paper trading, also known as forward testing or mock trading, is the simulation of the buying and selling of assets without spending real money. Paper trades are used to test a strategy before going live with real funds. It allows traders to simulate their strategies' performance, be it buying and selling stocks, bonds, or other trading assets without putting real money at risk. Completing a paper trade does not involve actual transactions but calculates performance as if you had.
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Benefits of paper trading
Paper trading will allow you to test strategies before putting your hard-earned money into an account. Since no real funds are involved, there's no risk and less stress. For new traders, this environment cultivates an early understanding of how markets work. You're free to make mistakes and learn uninhibited. Over time you'll learn what works, and grow confidence in a trading strategy. Paper trades are also rich in statistics, which can be used for future strategies and optimization.
Limitations of paper trading
At some point you'll trade with real money, and there are some things paper trading doesn't prepare you for. Emotional response being the largest contributor to losses. Everyone reacts differently, and this is unfortunately something that can only be learned by risking real funds.
You may also notice slight discrepancies in live order placement. For example, price slippage and funding fees aren't taken into account when paper trading. You may also notice a small delays, as real orders may take a second or two to execute at your price.