Paper Trading (Simulated Trading)

Paper trading simulates real market trading using fictitious capital. You place orders at real prices, see real-time market data, and track performance — but no actual money changes hands. Most major brokerages (TD Ameritrade, Interactive Brokers, Webull) and crypto exchanges offer paper trading features.

The primary value of paper trading is skill development without risk. New traders can learn order types (market, limit, stop), understand how leverage works, test technical analysis strategies, and experience the mechanics of trading before committing real money. The learning curve for trading is steep, and paper trading eliminates the expensive mistakes that accompany the early stages.

However, paper trading has significant limitations. The biggest is the absence of emotional pressure. When real money is at stake, fear and greed drive decisions that paper trading can't simulate. Many traders who are profitable on paper become unprofitable with real money because they panic sell during drawdowns or overtrade from excitement.

Paper trading also doesn't perfectly simulate execution. Real markets have slippage, partial fills, and liquidity constraints that paper trading engines may not replicate. In fast-moving markets, your paper trade might fill instantly at the desired price while a real order would have been filled at a worse price or not at all.

The recommended approach: paper trade until you're consistently profitable over 2-3 months, then transition to real trading with small position sizes (1-2% of capital per trade). Gradually increase position sizes as you prove consistency with real money. This phased approach builds both skills and emotional discipline.