Paper Trading vs. Live Trading: What Is the Difference?

Written By
G. Dautovic
July 13,2023

Paper trading and live trading are popular trading techniques. One allows you to practice trading on a stock market simulator, while the other is real trading with actual money. Check out our paper trading vs. live trading review to learn more about both trading methods and decide which is right for you.

Paper Trading Strategy Essentials

"What is paper trading?" is a question many beginner traders ask themselves. In a nutshell, it is a strategy benefiting rookie traders, even seasoned ones working on new ideas, allowing them to practice and figure out how the stock market functions in a safe environment.

They can buy and sell stocks with their paper trading account without using real money. Thus, this trading process bears no significant risks. Many popular online platforms offer paper trading services, which represent an excellent opportunity to hone your trading skills.

The Purpose of a Paper Trading Account 

When making a paper trade, investors mimic real-world trading scenarios to practice and improve their investment strategies. The main objective of having a paper trading account is to help investors hone their skills so they can make better decisions when actual money is on the line, especially when the volatility index rises or drops in financial markets.

When they start paper trading, traders make hypothetical trades using virtual funds. They base decisions on a stock represented on a website's chart, write down the ticker, and decide when would be a good time to buy or sell the stock.

If they buy the stock by trading paper money, they note the opening price at the beginning of the season, consult the chart and ticker on the trading day, and choose a spot that appears like a good entry.

Once they perfect trade on the paper trading platform, aspiring traders switch to live trading.

The Ins and Outs of Paper Trading

Before you begin evaluating paper trading apps and start simulated trading based on the market data, you should know that paper trading isn’t a perfect training simulation of the real-world trading experience. While you'll acquire some knowledge before trading with your own money, you'll face limitations related to interactions between markets and securities, for example.

With that in mind, let's dive in and see what paper trading pros and cons are.

Key Benefits:

  • Paper trades protect rookies from risking real money until they acquire skills to do business on real trading platforms. Along the way, they learn by observing their own mistakes and successes.
  • While making complex decisions based on the broader market conditions, paper trading can give novice traders confidence that will hopefully accompany them once they begin live trades with real money.
  • Live trading can evoke fear and greed in inexperienced traders. Paper trading can help new participants focus on the process and manage their emotions while mastering the trading system on the paper trading simulator.
  • Practicing for several weeks lets prospective traders obtain relevant knowledge about statistics and market approaches. Although initial results tend to be disappointing, this can prove helpful in the long run for educational purposes and the correct assessment of market fluctuations when real money trading begins.

Main Drawbacks:

  • Paper traders don’t deal with various hidden costs, unlike traders in the real money markets.
  • Market discipline can be improved as a paper trader, but the loss of real money may still affect people strongly and cause them to make rash decisions until they get used to the idea that the stakes are now much higher.
  • Another thing to consider when comparing paper money vs. live trading is that the real world sees more sudden, unexpected shakeouts and sudden price drops when mass stop orders start pouring in. In other words, it’s much easier to find stable commodities in paper trading.
  • Practicing on a paper trading platform can't give a complete picture of how the trading strategy will play out in real life. That's because it doesn't consider market conditions that can affect individual securities, with most equities corresponding to major indices when the Volatility Index (VIX) of the market grows. 

Live Trading

Once you start trading on the live markets, you switch from zero risk in trading virtual funds to risking real money. You'll deal with daily fluctuations while attempting to earn on the price difference in live trading.

So, ensure that you acquire substantial knowledge during paper trading, always remember your training, and try to control your emotions. Trading on platforms like Forex can be profitable, but only if you don't let yourself be carried away. Also, consider finding a good online stock broker to help you with investment advice or managing your investment account.

Live Trading Strengths and Weaknesses

As with paper trading, there are upsides and downsides to trading with real money. Let's see what some live trading pros and cons are:

Key Benefits:

  • You can make your decisions regardless of your broker's opinion.
  • While stocks may not bring you substantial gains quickly, dividends earn you rewards over time.
  • The most significant advantage of live trading is that it actually makes money. But refrain from trading big in the beginning since your past performance on a paper trading platform can't prepare you fully for making money on the real money markets.

Main Drawbacks:

  • Unlike paper trading, live trading can cause an addiction, especially if you're successful in making profits.
  • Using a trading live account is very stressful. You'll have to make quick decisions with little to no room for error.
  • Just like you can make money, so too can you lose it. Paper trading involves no risks or gains, but with unsuccessful live trading, you stand to lose a lot of money if you’re not careful.

In Conclusion

Regardless of their similarities, the difference between paper trading and live trading is quite substantial. The main one is that paper trading is done with virtual funds, while in live trading, you use real money. So before starting to trade for real, it's essential to learn and master the art of trade on a paper trading platform.


Is paper trading the same as real trading?


While they feature many similarities, paper trading differs from real (live) trading. The main difference is that you’ll earn (and risk losing) real money with live trading.

Can you make money in paper trading?


No. As we’ve mentioned when comparing paper trading vs. live trading, the former is merely a training tool to help you better understand the market. You’ll only be dealing with virtual funds, so there’s no earning potential. On the upside, you can’t lose any money either.

Is it worth it to paper trade?


Paper trading from a virtual account is worthwhile for beginner traders and those testing new strategies before trying them out on actual markets. You won’t earn any money, but you’ll gain valuable insights into the market.

About author

I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.

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