Glossary
Paper trading
Simulated trading with virtual money and real market prices, used to practice a strategy or learn a platform without risking capital.
On this page
Paper trading is practice trading: you place buy and sell orders against live or recent market prices, but the money and the fills are simulated. The name comes from the days when people wrote hypothetical trades on paper. Today most brokers offer a demo account that mirrors the real platform, which makes paper trading a low-cost way to learn order types, test a strategy's rules in real time, and find mistakes before they cost money.
How it works
A simulator gives you a virtual balance, say $100,000, and fills your orders using the current quote. It tracks positions, profit and loss, and often margin and buying power, just as a live account would. Unlike Backtesting, which replays history in seconds, paper trading moves forward one day at a time, so you face the same uncertainty and the same need to follow your rules without knowing the outcome.
What it does not teach
- Execution. Simulated fills are usually optimistic: no queue position, no partial fills, little or no slippage, and sometimes no fees.
- Emotion. Losing $2,000 of virtual money does not feel like losing real money. Hesitation, revenge trades and panic exits tend to appear only once real capital is at stake.
- Scale. Results with a $100,000 virtual account can tempt you into position sizes you would never use with your real balance. Matching the simulator's balance to your actual account keeps the practice honest.
Many traders treat paper trading as a stage between backtesting and small live trades: it checks that a plan can be executed in real time, not that it will be profitable.