Paper Trading – How to use stock market simulators for virtual stock trading and backtesting without risking money

Most people with at least some exposure to the stock market have heard of paper trading. Whether you are a trader or an investor, there are several advantages to trading with virtual money or a stock market simulator. Furthermore, paper stock trading can be beneficial to beginners and advanced traders alike. If you want to know how you can benefit from paper trading and how to go about it, read on.

Paper Trading
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What is paper trading?

Definition Paper Trading
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Paper trading is also known as demo trading, practice trading, hypothetical trading, and simulated trading. Essentially you are trading with virtual money. This means you can’t make real profits, but it also means you can’t lose real money. This is a particularly good approach to use if you aren’t sure your trades will be successful.

Traditionally paper trading was done by simply writing trades down or entering them in a spreadsheet. These days the entire process can be automated by using a stock market simulator or a demo account. We will cover the various ways to paper trade in more detail later.

Why it makes sense to practice before investing real money

Group of Traders
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There are lots of reasons to do some form of practice trading before you trade with real money. For beginners, paper trading allows you to do a lot of learning before you risk a cent using real money in the real market. If you are learning to trade, paper trading is an opportunity to learn basic tasks like entering an order, moving a profit target, or exiting a trade quickly. You can also get to know how a platform works and get to know the instruments you plan to trade. If you start out by paper trading, you can make as many mistakes as you want, and it won’t cost you a cent.

There are also psychological benefits that are just as important. Paper trading will introduce you to the effect emotions can have on your trading. It also allows you to get used to what a real P&L curve looks like. The reality of trading is that a successful string of trades includes winners and losers. To trade successfully you need to work out how to maximize the winners and minimize the losers. Trading skills improve with practice. This practice can be expensive if real money is on the line, but completely free with a stock market simulator. 

How experienced traders can also benefit from virtual stock trading

Paper Trader
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Virtual trading is not only for beginners. Experienced traders often paper trade to test new strategies, practice their execution and build confidence. They will typically paper trade when they are trying out a new strategy or trading a market, they are not familiar with.

For many traders, paper trading is an integral component of ongoing strategy and skills development. For example, you can test different order types to work out whether limit or market orders are best for a particular strategy. In this case you can keep two paper trading accounts each using a different order type. Once you have executed 30 or so practice trades you will have a better idea of which order type works best. This is something you will only know if you record trades based on live market data.

Analyzing Charts
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On shorter timeframes, execution is far more important than it is on longer term timeframes. Whether or not day trading strategies are profitable will often depend on the price at which each trade can be realistically executed. This in turn depends on liquidity, the bid offer spread and other factors. In such a case, you will only be able to determine whether the system is viable by paper trading using live data.

Finally, even the best traders in the world go through bad stretches. They will often use paper trading simulators or a demo account to get back “in the zone” and work out if they are in sync with a market. By doing so they can regain their confidence before risking capital again.

Backtesting vs. paper trading

Backtesting vs. Paper Trading
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Backtesting and paper trading are similar. However, they are not identical, and they serve different purposes. Typically, when a new strategy is developed, backtesting is the first test, paper trading is the second test and live trading is the final test. If the strategy fails either test, the trader needs to go back a step or two and find the weakness in the system. When a strategy is backtested, historical market data is used to get an indication of how well the strategy would have done in the past. Each trade included in backtest results is a simulated trade based on historical data.

There are however two potential problems. Firstly, the strategy may be overoptimized to perform on historical data and may not perform as well in the future. Secondly, the trade prices used in the backtest may be unrealistic. Paper trading is a way to test for both of these issues. Not all trading strategies can be backtested at all. Rules based strategies can usually be tested, however, there is no way to backtest a discretionary strategy based on qualitative data. In this case, only paper trading can be done before real money is put on the line.

Psychology of paper trading vs. live trading

The Cycle of Market Emotions
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One of the objectives of paper trading is to slow down and break up the learning curve. By using a demo account or stock market simulator you do not need to learn to trade and learn to manage your emotions at the same time. And, if you get it right you can actually learn how to eliminate many of your losing trades before putting real money on the line. Traders need to preserve both financial and psychological capital.

Losing money doesn’t only impair your financial capital, but your psychological capital too. And, when that happens, it affects your decision making. So, paper trading is a great way to build your confidence while learning how to trade. However, for many there is a challenge in transitioning from paper trading to real trading. Some decision making will just never be the same if you don’t have real money on the line. When you are trading with paper money there is no difference between $100 and $10,000.

In reality, there is a big psychological difference between having $0 and $100 on the line and a big difference between having $100 and $10,000 at risk. The implication is that traders may struggle to move from paper trading to trading with real money. They may also struggle to increase their trading size. The solution is to be aware of this limitation and to learn to think in terms of the percentage of an account that you are risking on each trade – whether it’s a real or demo account.

How to start virtual stock trading

Start Paper Trading
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These days most brokers offer some form of paper trade accounts – usually in the form of a demo brokerage account. A demo account is exactly like a live trading account except that it is funded with virtual money – typically $100,000 or $1 million. Demo accounts don’t only apply to trading stocks, but other assets like forex too.

A demo account is the easiest way to get started, but you can also use a dedicated stock market simulator, a spreadsheet or you can simply write your trades down in a journal. However, the advantage of a demo account is that you can seamlessly move from demo trading to live trading on the same platform.

You really don’t need to spend too much time deciding which tool to use. You can easily move from one tool to another at a later stage. There are two things to consider though. Firstly, whichever method you use, you should easily be able to calculate the P/L for each trade and keep track of the total account value. Secondly, it’s useful if you can attach notes to each trade detailing your thoughts when you entered and exited each trade.

Trader Workstation
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Paper trading tools can be divided into 3 categories: demo accounts, paper trading simulators and tools, and stock market games. The following are some of the most popular in each category:

Demo accounts

As mentioned, most brokers offer a demo account option, but the following brokers stand out:

  • TD Ameritrade’s Think or Swim platform allows you to trade with “paper money”, a virtual currency, alongside your live trades. It includes some of the most advanced trading tools available today.
  • NinjaTrader is a trading platform rather than a broker but offers the equivalent of a demo account. The advantage of this platform is that you can paper trade using real time or historical data. You can even go back and paper trade your way through the GFC of 2008.

Stock trading simulators

Paper Trading Simulators
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The best standalone paper trading simulators are not free like games and demo accounts. However, the fee may be worth it if you are taking your paper trading seriously.

  • TradingSim allows traders to practice day trading the market without risking a single penny. This trading simulator and market replay platform allows traders to simulate trades for any trading day in the past two years.
  • TradingView’s paper trading tools are highly rated. There are several payment levels offering different tools. The advantage of TradingView is that it is one of the best charting platforms around.
  • Warrior Trading offers a stock market simulator with rich data and educational tools attached to the platform. This is the most popular option for those learning to day trade US stocks.

Stock market games

Excited Stock Market Trader
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An immensely popular segment amongst newbie traders are stock market simulators that have been turned into games. The idea is that you can enter competitions or start competitions amongst friends. Whilst the trading is done with virtual money, real prizes can be won. This provides an incentive to make an effort, whilst learning in the process.

  • Wealthbase is a mobile phone app which offers various types of stock market games.
  • The MarketWatch simulator is one of the oldest and most popular around.

Pros and cons of paper trading

Pros / Cons Paper Trading
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There are several notable advantages to paper trading, as well as a small number of drawbacks to be aware of.


  • You can avoid large and unnecessary losses early in your trading career.
  • Paper trading is an opportunity to familiarize yourself with new trading platforms and markets without putting real capital at risk.
  • You can test new trading strategies and systems without risking capital.
  • Your investing education can begin long before you have enough capital to start a portfolio.
  • During challenging periods, you can get in sync with the market whilst preserving financial and psychological capital.


  • Sometimes, a stock market simulator can give you a false sense of confidence. This can result in overtrading and risking too much when you start live trading.
  • If you don’t spend long enough paper trading, you may not realize the impact of luck on a trading account.
  • Traders often struggle to transition from a stock market simulator to live trading.

Is virtual stock trading useful to investors?

Stock Market Investor
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If you are a long-term investor you may be wondering if virtual stock trading is as beneficial as it is for active traders. Trading typically requires better execution and market timing and a better understanding of supply and demand, technical analysis, and liquidity. On the other hand, earnings, margins, investment warning signs and valuation metrics are more relevant for investment strategies.

Simulated trading is certainly more relevant to trading where execution and psychology play a bigger role. However, trading skills can be especially helpful to investors in certain situations like buying and selling momentum and growth stocks which exhibit higher volatility or hedging by short selling.

Paper trading is a way to learn the trading skills that may be useful to your investing and speculating, without risking real money. A few extra skills can improve your edge – remember, it’s an investment myth that only the pros have an edge. But you still need to build your edge.

Tips to help you get the most out of your paper trading

Paper Trading Tips
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The following tips will help you get the most out of paper trading:

  • Take it seriously. You may have nothing to lose when you trade on a stock market simulator, but the more you treat it like the real thing the more you will benefit from the experience. One way to make the experience more realistic is to put a certain amount of real money on the line for each trade – say $10 or so. For each winning trade, the cash goes towards a reward for yourself, while the cash goes to charity for losing trades.
  • Try to become aware of the times your decision-making starts being affected by emotions like fear & greed. Becoming aware of the effects of emotion on your trading is the first step in reducing their effects.
  • When you move to a live account, try to be aware of any differences in the way you treat risk. The objective is to try and treat it the same way whether you have virtual or real money on the line.
  • Try to think in terms of probabilities and the percentage of your trading account at risk on each trade. Then, continue to do this when you move to a real-world account. If you can do this, the transition will be easier, and you will also be able to scale your trading effectively.

Conclusion: Practice trading with stock market simulators

As you can see there are lots of advantages to paper trading. Perhaps most important of all is that while you still need to put time and effort into your trading, you don’t always need to put real money on the line. In that sense you are risking your time and not your capital, which is itself a very good investment of your time.

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