Why paper traders may be smarter than they look

In the brave and bold world of online trading, the slow and steady, tortoise-paced paper traders who never actually put their money into play are routinely looked down on.

In an arena where huge profits can be generated in a matter of minutes, the idea that someone would simply shadow the markets making virtual trades that don’t actually ever turn over a cent can easily look naïve. After all, if you don’t have the courage of your convictions, what is the point even looking at the markets? There is another side to the story of those so-called paper traders.

The other side of the coin

It goes without saying that any market is a matter of the collective assessment of value at a given point in time. It doesn’t matter whether that market concerns currencies, stocks and shares or the future of bitcoin or pork bellies. Markets are expressions of value, and anyone looking at markets will be honing in on fluctuations in those valuations.

Those movements are the grist to the traders’ mill. Whenever a market moves there is a margin that can be capitalised on, sometimes spectacularly. The development of electronic markets, and in particular the concept of derivatives based on them, has brought what was once a rich man’s pastime within reach of all of us.

Affordable access

Services such as MetaTrader 4 with AvaTrade enable would-be investors to back their reading of the market with affordable bets that, for all their limited initial outlay, still retain the possibility of outlandish returns. It is possible to gain leverage of up to 400:1 on MT4.

But the downside is that investors are committed to the same degree of exposure. A dollar’s worth of investment can – if things are badly mismanaged – quickly spiral into a wholly disproportionate exposure. This is not an environment where it necessarily pays to learn as you go.

There is no doubt that for the diligently informed there is money to be made trading on market movements – either up or down. But there is equally no disputing the fact that this is an arena in which a little insight can be a dangerous thing. Trading is not for the uninitiated.

And that’s where those paper traders come to the fore.

Playing it long

Markets are innately complex entities. They are affected by any number of variables which, in real time, can make a mockery of even the most superficially plausible investment. Given such unpredictability, it only makes sense to acquire something more than a rudimentary working knowledge of the difference between a fixed and a floating spread or a limit and a stop order.

What makes perfect sense is to play it long. Taking a considered, risk-free taste of how the markets respond to key indicators and being able to measure – and refine – the quality of your own judgement is the perfect preparation to joining the big beasts of the market. Paper traders may look like they are simply too wary to do anything but play make believe, but if we see them instead as investors with a long-term vision and the good sense to learn from mistakes that cost nothing more than their own time and effort, you have to ask – just who should be looking down their noses at whom?