Paper trading
Practising without real money helps you with routines and rules. But you won't find out whether you can handle losses, because the feeling is missing entirely.
Learning objective: After this lesson you can judge what paper trading teaches you and what it can't replace.
With paper trading you trade with play money at real prices. Almost every provider has a demo account like this, and for the first few weeks it's very useful.
What demo accounts are good for
It's good for getting to know the order ticket without typos costing money. For testing whether you actually stick to your own rules. And for getting a feel for what fees and the spread add up to.
What they cannot test
It's useless for finding out whether you can handle losses. Losing €200 of play money feels completely different from losing €200 of real money. Staying calm in a demo account tells you nothing about yourself yet. Tim was calmness itself in the demo account. At his first real loss of €80 he moved his stop, exactly what he'd forbidden himself to do.
A practical path
So the practical way is: a few weeks in a demo account for the routines, then carry on with a very small real amount. Small real amounts teach you more than large made up ones.
Demo accounts are too kind in several ways. Orders are often filled without realistic slippage, partial fills rarely happen, and even large orders don't move the price. Together that makes your demo results look better than they would with real money.
Missing loss aversion
An important difference, though, is the missing loss aversion. Losses hurt us much more than gains please us, but only when real money is involved. In a demo account exactly the thing is missing that later leads people to break their rules. Discipline you showed there therefore says little about how you'll behave with real money.
Value for your routine
A demo account is still useful for checking your routines. Are your rules complete? Do you keep your journal? Can you handle the order ticket? Are your cost assumptions right? But it's no good for finding out how often your strategy hits (win rate) and what it earns on average (expected value). The fills differ too much for that, and there are usually far too few trades as well.
Summary
- A demo account is good for routines and rules, not for judging yourself.
- Fills in a demo account are usually too favorable.
- Small real amounts teach more than large made up ones.
Did you get it?
What don't you learn in a demo account?
How you react to real losses. The pain of losing only comes with real money.
Why do demo results look too good?
Because slippage, partial fills and large orders moving the price are usually missing.
What is paper trading good for?
For practising routines, rules and keeping a journal.
What others often ask about this
Practise with play money first or start with real money?
Practising first makes sense to learn the processes and order types. What's missing is the feeling of real losses. Many then switch to very small real amounts before committing more.
How long should I practise?
Until you've followed your rules over at least a few dozen trades. There's no fixed time span.
Check your understanding
Your task
Before your first real trade, write down what you will do when your position is down five percent, for example whether you will move your stop. Also decide on a small real amount whose loss would not hurt you, and note how many weeks of demo account you will give yourself first.
Sources and further reading
- Kahneman and Tversky's foundational paper (1979) in Econometrica shows that losses weigh markedly more heavily than equivalent gains in the value function, an effect tied to real changes in wealth, which is why it doesn't show up in a demo account. View source ↗
Related
- Your first orderStage 2
- Spread, slippage, and liquidityStage 2
- Finding a reputable brokerStage 2
- Paper trading simulatorSimulator
- Matching questions for this stageQuestions