Is there a safe way to learn options trading without risking real money? Yes, there is, and it’s called paper trading. It lets you practice options trading with zero risk—you can perfect your strategy without losing a dime. The best way to set yourself up for success in options trading is to get some experience and practice beforehand and do it without putting any of your own capital at risk!
Paper trading can be done in the old-fashioned way using a pen and a spreadsheet, or you can use paper trading simulators with an online broker that offers the service as a practice tool. Either way, you go, you can gain experience with the basic concepts of options if you’re a novice, or you can hone your skills/practice new approaches if you’re an intermediate or advanced trader.
What Is Paper Trading?
Paper trading is different from using a demo account. Paper trading is the most basic form of practice for new trades, while demos are at the next level. We’ll explain this in more detail below as we define paper trading and show you how it works when using a broker app, a practice account, and a virtual balance to fund your trading endeavors.
Definition of Paper Trading
Paper trading occurs when traders write down buying and selling decisions in a simulated trading environment instead of going through a broker and placing practice orders. It allows users to practice trades without using real money to understand the basics behind online trading. Users get a virtual account balance, and they can allot money where they see fit. Their trades are subject to real-world market conditions (as best as a simulation can).
Paper trading is suitable for both beginners and advanced traders. For newbies, it allows them to learn the skills and basic strategies while gaining insight into market fluctuations. Advanced traders with more experience can leverage paper trading to improve new trade ideas and perfect the techniques they’ve already used.
How It Works
Traders can use a few methods to practice their strategies “on paper.”
Of course, as expected, you can paper trade on actual paper using a pen and a simple strategy. You could even do it on a cocktail napkin. In a world where things are increasingly digitalized, paper trading on real paper can still be done quickly. After all, this is just practice, so you don’t have to risk any capital. How you want to do it is entirely up to you and what you prefer.
If you want to go the digital route when paper trading, you can use sophisticated stock market simulators—traders use virtual accounts and “fake” money to place trades in real market conditions. You can find these through online brokers offering their customers trading simulators.
Either way you go, you never have to risk your own capital to run trade simulations and work through new strategies “on paper.”
Now, let’s get into how it works logistically. We’ll highlight the main aspects of the virtual stock market simulators you find with online brokers to give you a rough idea of what to expect. You can apply these principles to paper trading using real paper, too.
- Paper trading simulations through a broker will give you an account with a virtual balance. You can also use technical analysis indicators and price charts to inform your decisions—these tools come with the account and your practice capital balance.
- When you’re ready to test out new strategies, you can begin buying or selling securities on the simulator.
- Keep a detailed record of your trades—it will help pinpoint which decisions led to a profit and a loss. Traders should write down the time and size of hypothetical buys and sell to track their profitability.
Why It’s Important
Paper trading lets traders master the complexities of options trading without financial risk. The more time you spend paper trading, the more experience you gain in the trading process as a whole, even if you aren’t using real money. Traders can build confidence in their strategies and approaches through repeated paper trading sessions because they can learn what to expect under certain circumstances and market conditions. Plus, the fact that you aren’t committing any money to the endeavor makes paper trading the ultimate stress reducer!
Benefits of Paper Trading for Options
Why trade on paper before putting your own money at risk? Based on this question alone, it’s obvious why paper trading would make sense for beginners or experienced trades who want to test out new strategies. Still, several great benefits come with paper trading, both on paper and online simulators, with a virtual balance.
Risk-Free Learning
Paper trading is popular with users wanting to test strategies and familiarize themselves with the platform—you’re using a hypothetical or virtual balance to test out your plan, so it’s a great way to learn about options trading without using your capital. You can’t lose money due to poor decisions or timing. You don’t pay to open or operate a paper trading account.
Understand Market Conditions
Traders who test their strategies on paper or using online simulators gain experience with real-time market conditions without emotional or financial pressure. This is not like live trading, where you’re using your own money, and the real-life stressors are much greater. Paper trading is extremely low risk and lets traders gain knowledge or develop new techniques in a low-stress environment.
Test Strategies
Paper trading isn’t just for newbies—advanced traders with years of experience might use paper trading to develop new trading techniques or work on a new strategy without practicing in a live trading environment. Traders can run hypothetical trade scenarios on paper to test different options and methods, such as straddles, spreads, and covered calls. Why risk your own capital when you don’t have to?
Platform Practice
Traders who practice strategies using paper trading simulators through an online broker can gain experience with a brokerage interface and become comfortable with how options trading works in a digital environment. Even though they’re technically trading in an artificial, simulated environment, they’re still gaining knowledge and experience of real-world market conditions and doing it without worry!
How to Get Started with Paper Trading Options
If this is your first time delving into paper trading options, we’ll chart out how to get started online using a broker website or mobile app. Follow the steps below to get a general idea of how to get set up with paper trading online and how to access helpful tools like technical analysis indicators and price charts.
Step 1—Choose a Platform
The first step is choosing the right platform for your online options trading needs and expectations. You’ll find a wide range of good choices, but these are the platforms we feel will deliver the best results and experience for users. Each of them has paper trading options:
Interactive Brokers
- Available in 34 countries and 27 currencies
- Customers can access over 150 market centers
- Use the portfolio analysis tool to gauge your investment performance against 200 benchmarks
- Trade fractional shares of American and Canadian stocks and ETFs
- Low commission and margin rates
- Access order entry tools, option analyzers, stock screeners, and other helpful tools
- Route your own orders
- Commission-free ETF and stock trading available (non-institutional traders)
- Overnight trading available
- Choose from a ton of bond options like corporate, municipal, and treasury bonds
Thinkorswim by TD Ameritrade
- Access a wide range of studies, drawing tools, and technical indicators to find the best opportunities and gauge potential risk
- Invest in stocks, options, futures, forex, and ETFs
- Updates are made based on user feedback
- Access educational resources, live-streaming news, and expert commentary when using Thinkorswim
- Great customization options: charts, orders, interfaces, etc.
E*TRADE
- Access stock screeners and analyst research to inform your trading and investment picks
- Develop a retirement plan with no annual fees using the free tools and guidance that E-Trade provides for those who want to open an IRA.
- Excellent trading options, including commission-free U.S. stocks, options, ETFs, and mutual funds
- Get live market commentary, free market data streaming, and real-time quotes
- Automated investment management—the E-Trade team manages your core portfolios
- E-Trade has an excellent user interface—review account information, retrieve price information, manage trading, and authenticate customers
- Use the watch list to monitor stocks, options, and ETFs
Webull
- Enjoy commission-free trading
- Access Webull on your phone, tablet, or desktop computer
- Get access to real real-time market data and technical analysis
- Stocker screener
- “Paper trading” for beginners or advanced traders
- Trade pre-market (4-9:30 AM EST) and after-market (4-8 PM)
- Place your orders using hotkeys
- Level 2 Quotes
- National Best Bid and Offer
Step 2—Set Up a Paper Trading Account
Now, let’s walk through the process of setting up a paper trading account—follow the step-by-step instructions on your selected platform to set one up.
- The first step is to sign up and complete the verification process. You will likely need to create a username and password to access your account securely. Once you’ve provided some personal information and verified your identity, you’ll be ready to explore the platform and set up a virtual balance and portfolio.
- Learn how to navigate the user interface. Look around at the trading tools and features the platform offers. The primary functions you’ll want to familiarize yourself with are instruments that let you execute trades and access market data to inform those decisions.
- Customize your starting virtual balance. Then, create a virtual portfolio by choosing the securities you’d like to trade. Allocate funds from your virtual balance to certain securities based on your trading goals or strategies.
Step 3—Select the Options Strategy to Practice
The next step is to choose the strategies you want to practice while trading options “on paper.” If you’re new to online trading, we’d suggest starting with techniques like covered calls or simple puts/calls.
- Covered Calls: These are an investment strategy in which investors hold a long position in a stock and sell (write) call options on the same stock. Investors sell a call option on a stock that they already own, and they’re “covered” because they own the stock. This offers protection to the investor if the stock price increases and the call option expires in the money.
- Long Put: Traders will buy a put option. If executed correctly, long puts can help traders get multiples of their initial investment if the stock falls significantly. When the stock falls slightly below the strike price, the option will be in the money and could possibly return the premium paid to the investor.
- Long Call: Traders can use this strategy to buy a call option at a predetermined price before the expiration date—it’s an alternative to buying stocks outright. Because you don’t outright own the stock, you can profit if it rises, but you don’t take any of the downside risk when things go south.
- Short Put: This occurs when a trader or investor sells a put option on a security. It’s a long call in that the trader can profit from an increase in the stock’s price, but it differs in that traders will incur losses if the stock price drops.
If you have some trading experience and are seeking advanced strategies, look into techniques like iron condors or credit spreads.
- Iron Condors: This advanced trading technique involves buying and selling four options with different strike prices but the same expiration date. These include a long put, a short put, a long call, and a short call. The goal is to profit from low volatility in an underlying asset and gain optimum profitability when assets close between the middle strike prices upon the date of expiration.
- Credit Spreads: Traders sell a high-premium option and buy a low-premium option on the same underlying security. The goal is for the trader or investor to achieve net credit as a result of this maneuver.
Step 4—Monitor Your Trades
The next step is to successfully track the performance of your paper trades over time using several useful metrics that indicate growth or loss.
- Profit and Loss (P&L): There are a few formulas for calculating profit and loss on your trades. For an open buy trade, use the following formula: (current rate – open rate) x units—use (open rate – current rate) x units for an open short trade. Use (close rate – open rate) x units on closed buy trades, and use (open rate – close rate) x units on closed short trades.
- Win/Loss Ratios: A simple formula for calculating the win/loss ratio on your trades is number of opportunities won / number of opportunities lost. The ratio will be displayed as a percentage. A value of 1.0 indicates a neutral ratio or that 50% of trades were profitable. If you’re over 1.0, it indicates more successful than unsuccessful trades, and being under 1.0 means you’re conducting more unsuccessful trades than successful trades.
- Strategy Success: To form a successful paper trading strategy, it’s best to maintain a strict risk-management policy. This includes setting stop-loss or take-profit levels that mimic real-world trading conditions as closely as can be expected. Once you know which strategies are making money or losing money, you can gain success in paper trading relatively quickly.
The most important part of monitoring your trades is making mistakes and learning from them. Even if your trading skills are more advanced, mistakes are bound to happen. Reviewing and learning from unsuccessful trades without any real loss is the best way to gain practice with trades and market simulations and experience with various trading strategies.
Key Features to Look for in a Paper Trading Platform
Suppose you’re looking for a solid paper trading platform. In that case, the website or mobile app should have certain key features if you want to have the best overall experience testing new strategies and techniques. We recommend only using platforms with the following four features for best results!
Realistic Market Conditions
The platform should simulate real-world conditions as closely as possible. Paper trading apps or websites offer environments identical to real-money trading environments, though they can never truly capture the broad market impact on individual securities or account for hidden costs like commissions or slippages.
Access to Real-Time Data
If your trading style is quick (day trading or scalping), you’ll need to use real-time data to inform your strategies and maneuver quickly in response to significant market changes. Because of this, we’d argue that it’s important that your platform uses real-time data quotes and option chain data. Orders aren’t routed to real exchanges in paper trading, but their system simulates order fulfillment based on real-time quotes. Virtual money is used to calculate account balance and performance numbers.
Mobile Compatibility
One of the best ways to practice options trading strategies “on paper” is to use mobile apps. You can take your trading experience on the go and access your trading platform from a variety of mobile devices, such as smartphones, tablets, etc. It would be ideal to find a platform that offers a web version of its app, which will allow you to trade options from your desktop computer at home.
Educational Resources
Another critical element of the ideal paper trading platform is that it offers helpful resources for new and advanced traders who want to keep learning new things about options trading. Look for platforms that provide built-in tutorials, educational videos, and guides for better learning. These educational materials and resources are typically found under the “Education” or “Learning” sections. Browse these sections to find the necessary tools, making your decision much easier.
Common Mistakes to Avoid When Paper Trading
Even though paper trading is a way to practice strategies without risking money, all in an attempt to avoid mistakes in the real-world market, there are some common mistakes that traders and investors make when paper trading in preparation for real-world trading sessions on their app of choice. Avoid these common mistakes to develop solid trading strategies and techniques for using your capital.
Treating It Too Casually
Part of paper trading is developing good habits and practices to make you successful in real-world trading with real money. Some people make the mistake of treating paper trading too casually. They see these practice sessions as a way to learn trading hacks that result in quick profits, thus not putting in the work to learn sound trading habits, skills, or techniques. It’s best to test out a few strategies, record the results, find out what worked or didn’t, and apply these learnings to the real market. In other words, you want to take this all seriously for the times when you’ll be using your own capital.
Not Tracking Your Trades
One of the biggest mistakes traders can make in paper trading is not recording what they did. It’s essential to keep records of all trades and the overall results to determine which strategies are working and which are a waste of time. It’s nearly impossible to trade paper without taking notes and expecting to master sound trading strategies from memory.
It’s best to document everything to find patterns or trends in what’s working or not working to gain critical insights. Tracking your trades can help you track your progress and learn from all your paper trading experiences, both good and bad.
Switching Strategies Too Frequently
Focus on one or two strategies at a time before experimenting with others. You can’t master a single strategy if you spread yourself thin while focusing on understanding three of four. Get one or two strategies down pat before moving on to others.
When to Transition from Paper Trading to Real Money
When is the best time to switch from paper trading to real-world training using your own capital? The appropriate time will be different for each trader based on their comfort level or how adept they are in learning and mastering options trading strategies based on simulations.
Performance Benchmarks
One of the best ways to know when to switch is to set benchmarks for yourself based on your recent performance in paper trading. An example would be to set a benchmark of showing profitability over the course of a month. If you can achieve this goal, you know with certainty that you’re ready for the next level. Only you can see when you’re truly prepared to move to the next step. Personal benchmarks are important to set and hit before pursuing real money trading.
Psychological Shift
When investors begin trading using a real account, a psychological and emotional component kicks in. Paper trading is risk-free while using a real account carries the very real risk of a trader or investor losing their own money. Real-money trading can trigger different psychological responses, such as traders becoming unwilling to take risks or paralysis that comes from the fear of losing their money.
How Does a Trader Prepare for the Emotional Aspects of Live Trading?
It’s critical to think before you act. Take the time (if possible) to step away, clear your head of emotions that trading might stir within you, and get into a rational frame of mind. When in doubt, go back to your trading plan and personal goals. Ensure the trade aligns with your plan and the strategy you’re hoping to execute. Referring back to your trading plan can help you stay grounded and keep your goals in sight.
The more you can begin implementing these thought processes and practices into your paper trading sessions, the easier it will be to apply them to your live trading plans consistently. Practice makes perfect, they say. With repetition and consistency, you can work these practices into your live trading regimen and keep from making mistakes from emotional trading.
Starting Small
To begin with, a small amount of capital is one of the best things new traders can do when transitioning from paper trading to a real account. For example, if your goal is to trade with $5,000, consider beginning with $500 to see how it goes. Apply this same principle to the amount of leverage and positions. As you become more comfortable with the real-world trading experience, you can increase the amount of capital you use in your account little by little to build it to your trading goal.
Final Tips for Maximizing Your Paper Trading Experience
How can you maximize your live trading experience beyond setting performance benchmarks, adjusting to the psychological shift, and starting out small? Check out our best tips for taking your live trading experience to the next level so you can thrive as much as possible when you transition away from trading “on paper.”
Take Notes
Keep a log of all your paper trades, the reasons behind each move, how well the trade fits into your overall plan, the end result, and how much money you profited or lost. Keeping a history of everything that goes on can give you critical insight into which strategies benefited or hurt you the most.
Looking back on your trade history can serve as a helpful reminder of the time-tested strategies that have worked for you—referencing these successes can give you confidence about future moves you don’t feel confident about. Looking at trade history also gives you a clear blueprint for strategies you’ll want to avoid altogether!
Set Realistic Goals
We mentioned earlier that you should begin small with your account balance and slowly build it as you gain confidence with the live trading process. We’d recommend doing the same with setting up trading goals, both for live trading sessions and even for your paper trading experiences. Start small with some realistic goals that you can achieve within reason. Once you’ve met those goals, you can make new goals that might be slightly more challenging yet easily attainable.
Don’t treat paper trading as a game. When the time is right, set serious performance goals for yourself, such as mastering a new trading strategy or improving your overall risk management. Make sure the goals are achievable and completely clear.
Use It to Refine Your Strategies
Some mistakenly believe that paper trading is only for new traders who want to gain some baseline knowledge before hitting the real markets. However, paper trading is also for highly experienced or seasoned traders who are interested in refining new strategies or gaining additional knowledge of the markets’ movements.
Begin a Paper Trading Account Today!
If you’re new to online trading or have a bit of experience but want to test new strategies, we’d recommend giving paper trading a try to get into the good habits and practices you want to have when trading with real money. What better way to get the practice and experience you need without wasting your money? Paper trading is the stomping grounds where you can cut your teeth before entering your first live trading session, where emotions can run high!
Master options trading without any risk! Sign up for a paper trading platform today to start risk-free building their options trading skills— free paper trading accounts are available at our favorite options trading brokers.
FAQ Section
What have most of our readers and customers been asking about online paper trading? We’ve taken the most popular questions on the subject and put them into this handy FAQ section where you can find some quick answers without having to read the entire paper trading guide—get the key highlights and main points right here!
What Is the Difference Between Paper Trading and Demo Accounts?
Paper trading lets inventors and traders write down imaginary trades to see how a specific strategy would work in the market. At the same time, demo accounts are simulators that let traders buy and sell stock in real-time. Demo accounts capture widespread information and can be used for testing and educational purposes. Demo accounts give you a much better grasp on performing successful trades, while paper trading is more about building a user’s self-discipline and confidence.
How Long Should I Paper Trade Before Using Real Money?
There are different schools of thought on this matter—it really comes down to how comfortable you feel putting your own capital at risk. We paper trade for at least six months in preparation for trading using real money. This can give you enough time to learn about market movements and what goes into a sound trading plan.
Are There Any Downsides to Paper Trading?
Paper trading has some drawbacks that are worth noting. It doesn’t include real-world costs like slippage or commission fees and never truly replicates the real-world emotional pressure or stresses of live trading. Plus, those who are paper trading can enter real-world trading with overconfidence, which could result in mistakes that adversely affect their trading choices.
Does Paper Trading Have Any Risks?
The only risk we see with paper trading is using an illegitimate online broker website or mobile app. Other than this, paper trading is the definition of risk-free because you aren’t using your own capital to practice these strategies or simulations. As long as you stick with any of our recommended brokers (Thinkorswim, E*TRADE, Webull, or Interactive Brokers), you should be okay with going!
How Do I Choose the Best Paper Trading App?
You’ll want to select a paper trading app with features or perks that work well for your trading plan and strategies. Use a platform with the trading instruments you’re interested in, offers the resources you might need to grow and learn (outside the paper trading function), and provides the most realistic experience when you test strategies “on paper.”
What Are the Best Reasons to Paper Trade?
Paper trading comes with a wide range of perks and benefits to both new and advanced traders. You can understand market movements and dynamics better using a paper trading simulation. Traders can test strategies without risking money—this lets them analyze market trends, understand the factors that impact their trades, and build confidence in their plans. Paper trading also lets traders learn from trading mistakes without dire financial consequences.
