What is crypto paper trading?
Losing money on investments is a very bad feeling. The vast majority of beginner retail traders feel discouraged by their first real loss in the market. Preparing for such downturns in one’s financial story is challenging and, some say, even impossible. The psychological effect of losing money after a bad deal is hard to explain with just a couple of words.
People who feel discouraged develop fear of losing more and start hesitating before placing any market which is the best way to miss out on valuable opportunities, especially in a market so quick and intense as crypto.
It is the biggest reason why many newcomers are often advised to gain knowledge and experience via crypto paper trading. This method of training has been known for a long time and practiced even in middle ages. The contemporary way of using this method is to engage with the stock market via paper trading meaning that you will write everything down and never actually interact with the market.
The method is quite simple:
- Start with a certain amount of virtual money.
- Follow the market, and write down market positions that you could open with said money.
- Track the performance of your portfolio by writing down losses and gains.
- Analyze the outcomes and finalize the bottom line when done.
This method is an excellent way to practice before jumping into the world of finance where you have to understand how prices work and when to expect a hit. With just enough experience with papers, a beginner feels more confident and can focus on some strategies that would have been completely terrifying without any prior practice.
What is paper trading in crypto?
Contemporary retail traders have access to a wide range of different services and products that can dramatically reduce the time usually spent practicing and preparing for an investment endeavor. The crypto market also has some very important traits that make it close to impossible to use the traditional paper method:
- The crypto market operates around the clock and situations change rapidly. Many retail traders usually stick to fast-paced strategies like day trading, scalping, swing trading, and more. Practicing them with paper is a chore and can be extremely frustrating.
- The sheer size of the market and its complexity make it hard for people to keep track of several digital assets let alone hundreds of them. However, it is exactly what a retail trader must do to achieve success in this highly diversified financial market.
- Market orders are executed instantly on centralized exchanges leaving too little space for error. You simply cannot spend even a couple of minutes on overanalyzing the next move. The situation may change unexpectedly.
In essence, the crypto market is too fast and elastic for many newcomers to understand it using just pen and paper. The old school method of training before doing is simply inapplicable in this domain.
It does not mean that people who work in the crypto space have no way to practice or test their theories regarding forecasting prices. The overall approach is different and requires one to use advanced technology such as cloud computing and algorithms to learn the intricacies of the market.
How does the paper trading of crypto work?
One of the biggest differences that the internet brought to the financial table is the proliferation of automation products that made it easier for many individual retail traders to keep up with large institutions. Algorithmic trading is something that was developed as a principle back in the 1960s, but it did not take form of something meaningful until the 1980s when banks and investment firms started employing computers.
Autonomous trading systems immediately proved their value by outpacing the market on average and leaving individual investors biting the dust. This imbalance was present in the world of finance up until the expansion of the Forex market that normalized using robots for trading.
Early products revolved mostly around social aspects (trust management, copy trading, etc.) and did not yet focus on actual automation. As various providers expanded their offerings to cover fully autonomous signal generators and advanced scripting, more and more retail traders started using bots.
The crypto industry was and still is perfectly suited for automation due to multiple reasons:
- Traders from all over the world are interacting with various digital assets around the clock creating a unique ecosystem that never stops spinning. It means that bots have an inherent advantage over human traders since they don’t need to sleep or rest.
- Bots make decisions instantly based on their programming. Machines never hesitate or second-guess their next moves. Instead, they act quickly to beat the competition. It makes them much better than human counterparts in some scenarios.
- You can set up bots to test various technical analysis strategies against the market history which is an excellent alternative to using paper trading method. Many newcomers benefit greatly from automating already existing and newly created strategies before applying them to the real market.
The vast majority of contemporary retail traders and small-time investors use automated crypto trading services to level the playing field and give themselves a chance at outperforming the market. While it is still quite hard to compete against huge hedge funds utilizing similar tools, automation is an incredibly useful tool for newcomers.
How to start a crypto demo account?
Automation is the way to go for people who want to practice and don’t want to spend precious time waiting for their strategies to be tested in real-time. Since many newcomers cannot achieve success precisely because they lack the necessary experience to avoid some pitfalls, this feature offered by companies like WunderTrading is a game-changer.
You can start a demo crypto trading account in just a few clicks for free :
- Create a new account at WunderTrading if you don’t have one.
- Go to My Exchanges and click the Add Exchange button.
- In the side menu that will appear select the tab Paper trading
- Choose the exchange to where you would like to trade virtually. You get $ 10,000 to trade virtually
- Once an account is created you are ready to trade and try all the functionality.
In the world of crypto, this method is the best way to identify consistent approaches to trading without risking any real money. You can also try crypto futures paper trading using special accounts on various crypto trading platforms focused on derivatives. Usually, brokerage service providers working in the crypto industry offer special free demo accounts that you can use to test strategies.
Why start from cryptocurrency paper trading?
Many brokers and even centralized exchanges have demo accounts which are, essentially, paper trading accounts. You will have "virtual” money that will never run out to test different approaches to trading while monitoring the actual performance of your portfolio. While it is not the best way to test technical analysis systems since you won’t be able to adjust everything, using these accounts is a good form of practice.
Even if you do like using these accounts to try out different strategies, you will still need to copy them on the TradingView platform and apply them to an automated system. The reason why you will need to do so is that experienced retail traders tend to choose companies that offer direct access to the spot market which is not always true for brokerage companies.
The excellence of paper trading for beginners
- One of the biggest challenges that newcomers have to overcome is the lack of knowledge and experience in the crypto market. It is a big domain with thousands of different financial instruments and a billion USD market caps. Navigating this vast financial world is quite hard even for people with previous exposure to investing.
- Apparent differences between stocks and crypto tokens start hindering your ability to analyze the crypto market using fundamental analysis techniques. You cannot assign any value to a token that does not have any real assets or capital behind it. This issue is the main reason why only technical analysis works in this digital ecosystem.
- Technical analysis relies on analyzing the behavior of the market and its participants using price action and trading volumes as main sources of valuable information. Interpreting the data is quite hard even for trained professionals. If you want to use these analytical instruments efficiently, you need to practice.
The paper trading approach, whether you do it manually or with automation, is a great way of testing theories and using newly acquired knowledge about technical analysis. You can quickly gain promising insights by simply backtesting your ideas against the history or applying them directly to your trading account while dedicating a small portion of your portfolio to experimentation.
Advantages of using automated paper trading
It is indeed safer to simply use backtesting features on the TradingView platform or use pen and paper to test strategies. However, using bots will give you multiple benefits:
- You can monitor the actual performance of any technical analysis strategy in real-time and adjust it without any pauses or interruptions.
- The outcomes of trades with strategically placed stop-losses and take-profits are immediately visible and can be analyzed on the spot.
- You can limit the amount of money you can afford to dedicate to automated paper trading. It is a good way to remove the risk from the equation.
- WunderTrading offers its clients a free plan that allows you to run up to five bots simultaneously which is more than enough for basic testing routines.
- Automation allows you to enhance precision and reduce time while testing various technical analysis strategies.
The main takeaway
Paper trading is a very old approach to practicing before committing to using real money in the market. However, the crypto domain is rapidly changing and you need advanced practicing tools such as automated paper trading and using demo accounts. We intensely encourage all newcomers to start with using various forms of automation and learning how the TradingView platform works before making investments using real money.