Paper Trading Futures & Forex: Pros & Cons

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Paper trading is a central component of trading education used by new traders as well as experienced market participants to test new trading approaches and ideas. Also known as simulated or sim trading, paper trading futures and paper trading forex allow users to test out new concepts without putting real money at risk.

To get the most out of trading in a simulated environment, it is important to understand the key benefits and limitations of paper trading.

Paper Trading Advantages

Simulated trading can help build confidence and insight and also improve a trader’s skill set. Below are some of the key advantages to paper trading:

  • Zero Monetary Risk: Trading in simulation costs nothing to the individual and thus there are no financial consequences for losing trades. Traders can gain risk management skills without the sting of losing real money.
  • Zero Stress: When real money is on the line, emotions can run wild. Simulated trading provides a stress-free environment where you can focus on trading and not managing an influx of emotions.
  • Practice in a Realistic Environment: The NinjaTrader platform was designed to create a realistic simulated trading environment which mimics live trading as closely as possible. This helps to make the transition to live trading much smoother.
  • Track Progress: Paper trading builds useful statistics regarding a trader’s strategy and approach. Using NinjaTrader’s Trade Performance window, you can analyze and track your trading development to determine what is working and what is not.
  • Shorten the Learning Process: Learning to operate trading software can initially be overwhelming, but paper trading provides a hands-on learning experience which can help shorten the learning curve. Through simulated trading, traders gain familiarity with the mechanics of order placement and position management which can help to reduce operational mistakes when trading live.

NinjaTrader provides a realistic & immersive simulated trading experience.

Paper Trading Disadvantages

While paper trading offers the ability to practice in a risk-free environment, below are some of the limitations to keep in mind.

  • Unrealistic Emotions: Trading with real money prompts an immediate emotional response in most traders. While a simulator does provide a realistic trading environment, the psychological component of a tangible financial loss is absent from paper trading.
  • Inhibit Growth: Sim trading for too long can prevent a trader from growing and also create a careless approach to the markets. If paper trading is not taken seriously, the transition into live markets can be that much more challenging.
  • Easy to Form Bad Habits: Since you are not penalized for making bad trades in a simulator, it can be easy for some traders to develop bad habits. Furthermore, it can be difficult to form good trading habits when there are no consequences for bad habits.

To gain live trading experience, traders must ultimately push themselves to trade with real capital. Most traders would agree that when you have some skin in the game, the experience changes dramatically.

Live trading of futures, forex and options carries substantial risk and traders should be aware that financial losses can and will occur. Understanding the specifications of instruments traded as well as employing risk mitigation techniques is essential.

NinjaTrader is always free to use for advanced charting, strategy backtesting and trade simulation. Get started with a free trading demo and start paper trading today!