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Paper trading vs Live trading
Quant Trading
May 30, 2022

Paper trading vs Live trading

This article is going to discuss the pros and cons of paper trading vs live trading. The best way to decide which one is right for you is to consider your goals, experience, and risk tolerance.

Paper trading

The first thing we should discuss in paper trading is the advantages. The most significant benefit is that there's no danger of making a loss, allowing you to test practices and analyze your mistakes and outcomes without fear. Simply said, you are not penalized for your bad timing or poor judgments, allowing you to recognize and correct your errors. The second advantage is that paper trading is less stressful and negative emotions such as fear and greed cannot grip you. As a result, this teaches and protects you from making emotional decisions and forces you to think analytically about developing the best process and approach. Third, paper trading allows traders to gain experience. A trader learns a lot about every stage of the trade: preparation, having an open position, and being committed to the plan. This implies that you as a trader can take a loss and move on without staying in the position hoping things will change for the better. Or take gains when the price reaches the level you determined, rather than staying in the position simply to make as much money as possible.

Nonetheless, paper trading has certain disadvantages. To begin with, while paper trading enables traders to strip themselves of feelings of losing and making money, it becomes a problem as time goes on. When you have your own money at risk, there is a significant difference. As a result, paper trading prevents traders from feeling real loss or gain, which may cause them to be unprepared to experience such emotions when they begin live trading. Another disadvantage of paper trading is that it does not consider fees and slippage costs. Therefore, it does not educate traders on how commissions can affect profits or how to deal with slippage during a trade. Finally, paper trading does not take into account the influence of the broad market on individual securities. Most equities follow major indices during high correlation times when the Market Volatility Index rises. Hence, while your results may appear impressive or terrible on paper, there's a good chance that broader market conditions influenced the outcomes rather than the merits (or weaknesses) of your position.

Live trading

Trading with real money, on the other hand, involves actual financial transactions. When you buy or sell stocks, bonds, other securities, or crypto with real money, you're exposed to the risks and rewards of the real markets. This can be more exciting and potentially profitable, but it also comes with greater risks. It is especially true if you don't have a solid trading plan or strategy. Also, you can get emotionally attached to your positions. If you start to feel like you're gambling, it's probably time to take a step back and reassess your trading strategy. Not to mention that live trading can be stressful. If you are constantly worried about your trades, it will impact your ability to make sound decisions. It's important to find a balance between being too cautious and being too risky.

Overall, if you are new to trading, paper trading may be a good way to get started. This will allow you to test different strategies and get a feel for the market without risking any real money. If you have been trading for a while, live trading may be a better option. This will allow you to put your skills to the test and make some real profits. With that being said, make sure that you are comfortable with the risks before putting any money on the line.

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