The Drawbacks of Paper Trading – Why You’ve Got to Have Skin in the Game

In this episode I'll walk you through all the major pitfalls new investors make when trying to paper trade stocks and options, and why it's important to have real money in the market.
The Drawbacks of Paper Trading – Why You’ve Got to Have Skin in the Game
Kirk Du Plessis
Oct 17, 2016

Paper trading has its place in the investing world, but it likely isn't as useful as many brokers and financial gurus make it out to be. In fact, I'd even argue that if you are currently paper trading you're probably not using the virtual platforms to get the optimal experience out of them. Now, I won't deny that paper trading does have some benefits in helping traders learn the mechanics, but the drawbacks, in my opinion, outweigh the perceived usefulness.

If you're still adamant about paper trading, that's fine too because I'll help you get 10x more results from your paper trading activities by accelerating your learning curve with a few simple tweaks. Ultimately, at some point, you've got to make the jump into real money trading and the sooner you do the better off you'll be. There's no substitute for real-world, real-money experience in this business.

Benefits of Paper Trading:

  • The biggest single benefit to paper trading is it helps you get familiar with the mechanics of how to trade; working with the platform, getting orders into the market, setting up pricing.
  • Paper trading gives you the ability to enter multiple trades at the same time, which you might not have in a real trading account.
  • You also have the ability to start considering your portfolio balance, allowing you to understand how to look at your overall portfolio and how to analyze it.
  • With paper trading you can easily go back and retroactively test all of the mechanics of trading. You can immediately see the impact of different trades in a paper trading account.
  • Paper trading can be used as a great learning tool to simulate methods of how to rebalance your portfolio, to understand which trades will get it back to neutral in various scenarios.

Drawbacks to Paper trading:

  • With paper trading you are not using your own money and do not have any “skin in the game”. Trading with real money emotionally connects you with the market causing you to make different decisions than you would paper trading.
  • Without real money in the game, you are not forced to make decisions about generating income. When your money is at risk, it forces you to start making serious decisions about how you allocate, which requires more patience, diligence, and research than paper trading.
  • When you are paper trading, often times if your trades are unsuccessful it gives you a false sense that because it isn't real money it does not count, and that you will do better when you are trading actual money, which is in fact not true.
  • Paper trading fills happen a lot quicker than it actually does in the real market. This may cause you to get much different pricing in the real market compared to when you are paper trading.
  • When paper trading, traders will often times open up large $100,000 paper trading accounts, which is not representative of their true account size that they will be starting with.

Conclusion:

Paper trading definitely has its place in the market as a learning tool to understand the mechanics of trading. However, you need to start making real money trades as soon as possible. Making trades with your own money is what will ultimately get you to where you want to be with your overall trading, income, and wealth goals.

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