What to Consider When Shifting from Paper Trading to Actual Trading
Are you ready to learn what to consider when shifting from paper trading to actual trading? It’s a big step — the equivalent of taking the training wheels off your bike. But while you may lose the safety of the paper-trading platform, you could gain the potential financial benefits of real-world trades. This guide can help you make a smooth transition.
The right investment platform can also help with this transition. Modern platforms provide the tools and resources you’ll need to start investing and monitoring your trades. These electronic resources help you develop and refine your strategy as you navigate the real-world market.
Understanding the Shift from Paper to Live Trading
Trading on a demo account is one of the safest ways to learn valuable trading skills. Paper-trading apps allow you to learn from your mistakes, and many provide tips on honing your trading strategy.
But when you move from paper trades to live trades, that safety net disappears. Now, you’re using with real dollars, which means you’ll need to think carefully about your decisions to help minimize your risk while working toward your financial goals.
8 Steps to Consider When Moving from Paper to Live Trading
Setting up a paper-trading account is an excellent idea for beginners to practice and learn to invest. But how do you know when it’s time to move to a live trading account? Here are some steps that can help you make that transition.
1. Paper Trade Like It’s a Live Trade
Although paper trading is a demo tool, it’s important to take it seriously. Treat every paper trade as if it were a live trade. That way, you’ll cultivate trading skills that can help you once you begin trading on a live platform.
2. Journal Your Tests
Keep a trading journal while using your demo account. Recording all of your paper trades will help you learn from your mistakes and refine your strategy. For example, you might record the opening price, the reason you chose the asset, the closing price, and the profit or loss gained from the sale.
3. Take Your Time
Rome wasn’t built in a day — so why should your stock portfolio be any different? Aim to spend at least six months with your demo account before transitioning to a live brokerage account.
It may even take a full year to learn the patterns that come with cyclical industries. You may need enough time to understand the general behavior of the market and feel confident in your investing strategy before going live.
4. Set Your Expectations
Paper-trading apps are designed to mimic actual market conditions, but they’re not perfect. Market conditions change — sometimes unpredictably.
It’s important to know what to expect when you start live trading so you’re not overwhelmed by sudden market swings. For instance, paper trading allows you to learn how certain industries react to economic shifts and develop strategies to help manage this volatility.
5. Start Trading Small
Don’t invest more money than you’re prepared to lose. Instead, start with small, manageable amounts.
Some investors prefer the dollar-cost averaging technique: Instead of buying 20 shares of a stock on the same day, purchase two to three shares every few days. Even if the stock price fluctuates, over the course of the purchasing period, there's a greater likelihood that the average cost basis is more favorable than if you tried to time the market and bought in at the wrong time.
6. Reassess Your Trades
Your trading journal isn’t just for your paper trades. Keep a close record of all of your investments. That way, you can reevaluate your trades down the line.
For instance, if one of your stocks plummets below its purchasing price, you may consider selling it to cut your losses. And if your goal is long-term growth, you might consider including other types of investments to diversify your portfolio.
7. Keep Improving
Learning what to consider when shifting from paper trading to actual trading isn’t always linear. Find ways to improve your trading strategy. Read stock newsletters or subscribe to a stock research blog to enhance your skills and knowledge. For instance, learning more about a company’s value chain can help you understand its potential for future growth.
8. Go Back to Paper Trading
You shouldn’t get discouraged by a setback, but don’t stick to a losing strategy, either. If things aren’t going as planned, you might consider returning to paper trading — at least for a while. Use the time to refine your strategy, and ensure you're comfortable with live trading before considering making any new investments.
Define Your Goals — Then Reach Them
These tips can show you how to shift from paper trading to actual trading. But your ultimate trading goals are still up to you to decide.
Whether you’re day trading or building a retirement portfolio, stock market investing can help you achieve your financial goals and secure your financial future. And by practicing with paper trades, you’ll develop the skills you’ll need to better help manage risk and earn potential returns.
Frequently Asked Questions
Can you make real money from paper trading?
No, you can’t — but that’s the point. Paper trades don't require any money, which keeps you safe as you learn the ropes. You won’t earn money no matter how well your stocks perform.
How long should you paper trade before using real money?
This will depend on each individual's circumstances and also how long it takes them to become comfortable. Consider conducting paper trades for at least six months before switching to a live brokerage account. Even after switching, it helps to maintain a demo account to hone your strategy.
Is paper trading easier than real trading?
Ideally, paper trades should resemble real trades. It’s important to take them seriously in order to shape your investing strategy. With that said, real-world conditions are unpredictable, so paper trading’s lack of risk makes it a good way to prepare for the real thing.