Trading in the crypto market is a serious business where the right move may grant a trader a fortune and vice versa. Even though losing money on trades is like a constant, some traders have mastered their art to minimize losses.
One of the few ways that they have been able to practice is through crypto paper trading. Crypto paper trading is one of the few tools that institutional investors use to practice their trading.
It is also regarded as simulation trading because the platform provides traders with a fund to perfect their trading skills. This is usually done on a Demo account provided by the platform where traders carry out their main trade.
Paper trading dates back to traders wanting to see if their trading strategy would work so that they would write it on paper. During this period, traders always used their paper trading strategy to trade long term or short term.
Pros of Paper Trading
Just like trading, paper trading also has its advantages. It gives you a lot of benefits as a new trader. Below are some of them:
1. Risk-Free Trading
One of the many benefits of using a paper trading account is that traders can practice their trade strategy. While practicing their trading strategy, traders can use their demo trading accounts and avert all risks. Most of the time, traders either use their demo accounts to try out new platforms or try out a hypothetical trading strategy.
Demo trading accounts also provide new traders with the feel of the market before they venture into full-time trading with real money. However, traders should know that trading with real money will differ from using a demo trading account.
2. Building Confidence
Confidence goes a long way in determining how a trader might perform in the real trading world. Paper trading allows new and old traders to build their confidence before trading with real funds. In demo trading, traders often deploy their strategy and hope they win profits, even virtual. Things like this and the success of the trading strategy they deploy to earn profits will go a long way to boost their confidence.
3. Gaining Practical Knowledge
Paper trading helps traders to practice with different trading scenarios of their choice. As the saying goes, practice makes perfect, and traders need to practice to perfect their strategies. Perfecting their technique in a practice demo account will help them prepare for specific events. Even though traders cannot precisely prepare for events in the market using a demo trading account, it will help them know the following steps to undertake.
Cons Of Paper Trading
Just like anything with advantages, there are disadvantages to paper trading. Paper trading poses some threats to trading patterns even though not visible. Below are some of the disadvantages of paper trading:
1. Market Impact
Even though paper trading allows traders to trade using a demo account, it does not provide the feel of a real market. Market volatility is always predominant in the crypto market, and demo trading will not prepare traders for it. Even if traders record high profits during paper trading, real-life trading will pose significant challenges.
2. Commission And Fees
Another aspect that paper trading does open traders to is the payment and fees associated with trading. While paper trading, all fees and commissions related to carrying out trades are waived. This does not happen when traders carry out real-life trades as brokers and platforms add their transaction costs. For instance, during paper trading, a trader might purchase an asset for $10, while in real life, a trader might purchase the same asset for $11. The additional $1 is the fees and commissions that are not added when paper trading.
3. Emotional Check
Generally, trading requires that traders exhibit some emotions and put others in check. This single aspect has helped create great traders in the market. Emotions like greed and fear are common when trading in the real world. In paper trading, traders carry out their activities without the need to exhibit these emotions. This is because they can carry out trades without fear of losing and the greed of taking profits at the slightest chance.
Conclusion
Even though paper trading is available to all traders in the market, new traders enjoy the sole benefits of using it. This is because new traders would be comfortable trading in the real world after trying their hands on paper trading. Another thing is that traders get to act out their strategies in a demo account and perfect them before taking on real-life trading.
Though some strategies will not apply to specific real-life trades, traders would still have gained a vast amount of experience during paper trading. Once a trader feels he has mastered enough, he can slowly ease into the world of trading and eventually become a seasoned trader.
