By Steve Burnett
Cryptocurrency trading has so many risks attached, and these risks are even more real for beginner traders. Even experienced traders get to lose their investments every once in a while, hence the need to be cautious.
To help reduce the risk, traders invented what is now called paper trading. It allows you to experiment with crypto trading outside the use of real money, so that you can make progress with the process before using your real money to trade.
Although this does not eliminate your chances of losing your capital, it does reduce the chances of it happening significantly. In this guide, we discuss what paper trading is, how it works, and why it is important.
If you’re thinking of becoming a crypto trader, you should read on to find out more about this important subject.
Paper trading
As stated earlier, crypto trading involves high risk, because of the massive volatility that characterizes crypto assets. It is therefore critical to test the waters before investing a huge amount into trading in which you can potentially lose everything. This is where paper trading comes in.
While it works just like real crypto trading, it allows you to trade without exposing you to any real risk, since the money you’re using to trade is pseudo money. It is called paper money, hence the name paper trading. It’s like a demo account.
In order to trade effectively and profitably, you need to have a strategy. Your strategy has to be tested and proven before you start trading with real money. Paper trading is where you use paper money to test your strategies until you become consistently profitable.
When this is attained, you can be fairly sure that you have a chance at winning in real trades.
Where to Do Paper Trading
Because of how important paper trading is, virtually every crypto trading platform you know offers its users a platform for paper trading. Before you go to your main trade, you will see an option to start paper trading.
On some platforms, it may not be called paper trading, but instead a demo account. This simulates a real trade and allows you to make all the mistakes you would potentially make in a real trade and learn from them.
Another place where you can do paper trading is on TradingView. Although it is not a crypto exchange like Binance, it allows users to access the paper trading feature to hone their trading skills. You can get up to $100,000 of pseudo money to practice with.
To benefit maximally from the process, you should approach it with the same profit-and-loss attitude with which you would approach a real trade. Many traders fall into the temptation of using the paper trade casually because it does not involve any real risk. You’ll spill such an attitude to your real trades and can get rekt easily.
Cons of Paper Trading
We have been mentioning the importance of paper trading and why it is important. Does this mean that there are no downsides to paper trading? No, far from it. Like anything else, paper trading has its shortfalls.
First, it gives you a false sense of security, which you cannot import into your real trades. Anyone would normally be more relaxed and composed when trading with paper money compared to when using real funds.
Secondly, paper trading only exposes you to basic investment strategies such as buying low and selling high. Real trading is more complicated than this, and this can be a staggering reality when you start trading with real money.
Conclusion
This is what paper trading is, and if you wish to become a profitable trader – have more wins over losses, you need to start practicing with it as soon as possible. Again, it doesn’t make you immune to losses, but it does reduce your chances of losing all your capital, in every trade.
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