Paper trading is trading with no real money and just with live market price. Let us understand how to paper trade the right way.
Paper trading is trading with no real money and just with live market price. Live price for a stock is available at NSE or BSE official website.
If you plan to purchase any stock, head towards the live pricing of the stock being traded at the given price and then buy it from the available sell orders.
Let us understand the order book for a stock and what should be your purchase and sell price for paper trading of a stock. I have selected a stock which is not very actively traded so we can understand the difference between buy and sell orders.
In the above screen shot we see 5 best buy and 5 cheapest sell orders for a stock. There is a sell order at a minimum price of 119.60 and buy order at 117.55. Looking at total order quantities for each suggest there are more buy orders at lower prices and so is the case with sell orders at higher price.
So if you want to buy a stock the price has to be 119.60 and if you want to sell it, it has to be at 117.55.
So in paper trading when you want o execute an order, purchase it from the first sell order available.
Now if you want to sell it, use the buy orders. Once the position is squared off, you calculate your profit or loss less the brokerage paid in the transaction.
The orders being executed for paper trading just gets added into an excel sheet along with the brokerages. You can apply a very simple formula in excel for calculating the brokerage.
Why Paper trading is needed?
Paper trading is very essential part of trading and it is not only needed for new traders but can also be used for experience trader. At times I still use paper trading till date.
Many a time it just happens that you are hitting a series of stop loss for your trades and so to come out of that loss making streak, you may need to keep your hard earned money in the sideline and go back to paper trading. The best way to understand it is out of form batsman in cricket (World cup fever). When you are out of form and not able to perform well, you tend to go back to nets and practice. Even the best of the batsman do that and paper trading is exactly the same.
How not to execute paper trading?
When it comes to paper trading the biggest mistake that many new investor makes is execute trades based on wrong orders. When you are buying a stock, you buy from the sell orders and not from the buy orders. So is the case with the sell orders. You execute the orders only when there is buyer for your stock.
While paper trading will help give you the practice you need, there are a few downfalls. Because it doesn’t use real money, you don’t get an idea of how fees and commissions factor into your trades. These simulators also don’t accurately reflect the reality of the markets, with the lows and highs and the emotion that goes along with trading. Thus, it’s important to remember that this is a simulated environment as you get your trading skills in check.
Neelanjan Nag says
Did’nt understand the illustration given with the 5 stocks.
“So if you want to buy a stock the price has to be 119.60 and if you want to sell it, it has to be at 117.55” – does this means that I will buy at a higher price and sell at a lower price.
Shabbir Bhimani says
Paper trading means not trading with real money but only doing it as practice with real price levels in market. First step is to understand the basics and not getting into the market with your real money.
It is as simple as that. Once you start doing the paper trading, you will find those levels of buyers and sellers