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Many new investors are wise to try paper trading before jumping into real-money trading. Paper trading allows you to set up a virtual portfolio and execute pretend trades to get a feel for the markets. However, paper trading can establish bad habits for traders, which we should avoid. 

In this article, we’ll highlight the most common mistakes to avoid when paper trading so that you can use the simulation constructively.


1. Don’t Get Overconfident from Early Wins

One of the most common errors in paper trading is valuing early wins too highly. When you start paper trading, you may find that beginner’s luck is on your side, and your simulated portfolio shoots up quickly in value.

Yet, it’s important not to let this early and easy success go to your head. The market can turn on a dime, and consecutive losses could be just around the corner. Stay humble, and use wins as learning opportunities rather than inflate your confidence.

It’s easy to fall into the trap of thinking you’ve discovered some foolproof strategy when paper trading, only to have the markets abruptly humble you. Paper trading aims to learn in a risk-free environment, not rack up bragging rights.

Focus on practising solid risk management and researching trades thoroughly rather than chasing quick profits. Early wins when paper trading means very little, so keep working to strengthen your skills.


2. Avoid Unrealistic Levels of Risk

Another common paper trading pitfall is taking on levels of risk that you’d never accept when actual money is at stake. For example, you may take much larger position sizes than you can afford, chase highly volatile penny stocks or forex pairs, or trade on dangerously high leverage ratios that would be financial suicide in live markets.

It’s easy to rationalize unreasonable risks when paper trading since there are no repercussions for massive simulated losses. But, taking on unrealistic risks establishes terrible habits and gives you false confidence in your ability to tolerate high levels of risk.

Make sure the risks you take when paper trading reasonably match what you’d be willing to risk when real capital is on the line. The goal is to practice solid risk management, not take reckless bets.

Pay close attention to your emotional response as your simulated positions experience volatility. If you become stressed and anxious when your paper trades move against you, that’s a sign you’ve taken on too much risk.

Even though it’s not real money, you should still feel a healthy sense of risk when paper trading. Practice keeping your position sizes and leverage modest.


3. Don’t Neglect the Research Phase


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Some traders get so eager to jump into paper trading that they neglect researching beforehand to identify promising trades. Research is just as important in paper trading as in live markets.

Don’t take a trade just for the sake of trading—sit down and analyze financial statements, identify chart patterns, study macroeconomic events, examine fundamentals, and research catalysts that could impact your trades.

The level of research you do before taking a paper trade should mimic what you’d do before placing a live trade when capital is at risk. Rushing into trades without research establishes reckless habits.

Instead, be patient and do your homework before each paper trade to build a research-first mindset that will serve you well in actual trading.


4. Avoid Emotional Attachment

It’s common to form emotional attachments to your simulated positions when paper trading. You cheer on rising trades and agonize over declining ones, even though no real money is involved. However, forming emotional attachments, even to pretend positions, distorts your objectivity.

You may start making questionable decisions, such as averaging down on losers or prematurely taking profits on winners, rather than sticking to a trading plan.

Strive to keep emotions muted and make all trading decisions rationally rather than based on feeling. Detachment will help you stick to trading plans, admit when you’re wrong, and respond appropriately to changing market conditions.

Practising detachment when paper trading will come more naturally when real capital is on the line.


5. Paper Trade Actively, Not Passively

Some paper traders pull up a platform, put on a few trades, and then check back days or weeks later to see how they did. This passive approach misses much of the learning potential in paper trading.

Instead, use paper trading as an opportunity to practice active trading techniques you’ll need once you go live. Check prices frequently, update stop losses, monitor breaking news, close positions intraday, adjust position sizes—actively manage the virtual portfolio as if real money were at stake.

The mechanical habits built through active paper trading will prepare you to transition to live trading smoothly. If you just passively monitor a virtual portfolio, you’ll be unprepared for the faster pace and greater intensity of actual trading.

Make paper trading a hands-on experience that builds active trading skills in a low-pressure environment.


Here’s an interesting read for you: Psychological Differences Between Professional and Amateur Traders


6. Don’t Hesitate to Take Losses


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Some traders strive for unrealistic perfection when paper trading. They refuse to close out losing trades and hold out, hoping the tide will turn in their favour. However, this gives a distorted perspective on trading expectations.

In real-life trading, you must quickly admit when you’re wrong and take your losses before they become catastrophic.

Practice taking losses swiftly when paper trading, just as you would in live markets. Don’t hesitate to realize when a trade has turned against you and close out the position before incurring greater drawdowns.

Taking losses quickly and decisively is a skill that must be practised. Paper trading provides a risk-free environment to ingrain the habit of cutting losses early before they become more painful.


7. Review and Analyze Your Trades

The learning doesn’t stop once a paper trade is closed out—that’s when the real learning begins! Review each completed paper trade and ask yourself:

What was my rationale for entering the trade?

Did it hit my profit target or stop loss?

If I lost money, could the trade have been avoided?

What did I learn that can improve future trades?

Analyze your losing and winning paper trades to understand the reasons behind the outcomes. Just as professional athletes review game film to improve performance, analyze your paper trading transactions to reinforce successes and identify improvement areas.

Review establishes an iterative learning loop that continually sharpens your skills over time.


You might also like to read: Forex Risk Management - A Must-Know Guide



Paper trading provides novice investors with invaluable hands-on experience in a risk-free environment. While it can prepare you for live markets, some common pitfalls must be avoided for it to be as effective as possible.

Don’t get overconfident from early wins, take on unrealistic risks, skip research, grow attached to positions, passively monitor trades, hold onto losers, or neglect review.

If you actively paper trade while avoiding these missteps, you’ll gain experience and habits that seamlessly translate to improved performance in live trading.

Use paper trading robustly and strategically, and it can fast-track your learning curve as a trader.


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“When considering “CFDs” for trading and price predictions, remember that trading CFDs involves a significant risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be considered investment advice.”

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