Thursday, February 19, 2015

Paper Trading vs Real Trading

Is there a difference between paper trading and trading with real money? The short answer is yes, and it comes down to two key elements: you and your broker. It doesn't matter if your paper trading involves actually pen and paper, if it consists of a watchlist, or if you use a demo trading account online – these difference will still apply.

Your efforts to paper trade are valuable, don't get me wrong – after all practice makes perfect. You must practice your system and your practices so you can better execute the trades when your signals are triggered and paper trading can and will help with this.
However you should realise that your performance when paper trading may be very different to when you begin trading with a real account.
Brokers may often supply delayed or even fictional price feeds to people who do not have a real trading account. Another factor to be considered is the difference in trade execution in demo accounts vs real accounts. A real account will often have what's called ‘slippage' or a delay in executing the order. This may result in the trade being executed at a price you did not wish, or not being executed at all. A demo account on the other hand will not usually have much slippage, if any at all – so this can give you a false expectation of how the platform you are using performs when you trade a real account.
The other key factor is you. Psychologically, it's a lot harder to ‘press the button' or ‘pull the trigger' in executing a trade when you are trading a real account. This is naturally because it's your money on the line and you may hesitate when your signals are triggered and you find yourself ready to execute the trade. Demo trading is simple in that you are unlikely to experience any hesitation in executing your trades, because you're not using any of your own real money.

It is important to note that different types of trading will have different impacts when considering demo vs live trading. For example if you're trading eminis or the stock market, slippage will be a real concern – especially when you are entering a trade at market prices. On the other hand if you are trading forex, slippage is unlikely to be much of a concern.
Paper or demo trading is a valuable exercise in practicing and learning to trade. But you must be aware that there are differences between the two. The best way to find out how this affects you is to ask your broker about it. If you are not getting a clear answer or one that you're happy with – choose another broker. Remember there's plenty of competition out there and you want to have a broker with a platform that performs best, especially when you take the next step of trading with real money.

Erik promotes the financial education of the wider population and highlights strategies of creating wealth and success for families. is a resource for people who want to gain knowledge about this topic, offering free and paid services, articles, resources and information.