Any person getting into Forex always starts with paper trading. It is from paper trading that we learn about pips, leverage, executing a trade, and all the ins and outs of trading. After which, traders are free to continue paper trading or switch to live trading immediately.

Knowing when to switch from paper trading to live trading is critical to your trading success. Any trader possessing a real account knows that trading in such an environment differs from paper trading.

The emotions, psychology, greed, FOMO, etc. that come with live trading are not the same as that of demo trading. If you don’t know how to handle these, you will lose a lot of money trading.

That is why traders are advised to stick to paper trading as long as they want. Unfortunately, demo trading doesn’t teach you how to handle the feelings of worry, panic, and stress seen in real-time trading.

That begs the question: when should you switch from paper to live trading?

What is paper trading?

Paper trading is trading that doesn’t involve the use of real money. Some people call it demo or simulated trading. The environment is similar to live trading but with little Know Your Customer (KYC) requirement from the broker when opening an account.

How to use paper trading to your advantage

Most times traders would use paper trading to learn the basics of Forex, such as how to execute a trade and know the ins and outs of the trading app. You can use paper trading to test trading ideas, build on a strategy, and study how the market or trades behave.

Is paper trading effective?

To some extent, paper trading is effective. It is from demo trading that you can develop a trading strategy, test some of your ideas, and approach to trading without putting your hard-earned money on the line.

What are the limitations of paper trading?

However much paper trading allows you to learn how to trade and test things around, it fails in certain aspects:

1. It is hard to learn from your mistakes. There are a lot of mistakes made in trading. If you are trading with real money, you will always note those mistakes and learn how to avoid them unlike when using paper money where if you lose because of a mistake it won’t have much effect on you (you won’t feel pain or worry since you lost zero money).
2. It is hard to develop trading discipline. Trading requires a lot of discipline. If your rule is not trade pullback, that is what to stick to. This is easier to do when using simulated accounts. However, when real money is put in line, especially when recovering from a loss, you will quickly break those rules.
3. It is hard to practice risk management with paper trading. Since you are not using real money, it is hard to figure out your risk appetite. It is hard to know when or where to get out when a trade is going against you, and when to let your profits run.
4. Paper trading can’t help you learn how to manage emotions or feelings of worry. Forex trading comes with a lot of emotions, anxiety, and stress when real money is used. The faster you know how to manage these, the better you will be at trading.

Reasons to move from demo trading

One thing I have learned about Forex is that when you start trading with real money, you throw away all you learned in demo trading. For example, on many occasions, you will find it hard to close a trade when in reds or even let your profits run when in blues.

You will disregard your risk management strategies, engage in emotional trading, move stop-losses, and get angry at a trade by revenge trading.

These are the most important reasons to move away from paper trading as soon as possible because it doesn’t teach you how to manage emotions, maintain trading discipline, or manage risk. Trading requires one to be responsible for how they trade, be disciplined, and practice risk management. You can only learn these using a live/real account. As one trader says on Reddit, “No amount of demo trading can prepare you for live trading.”

Switching to live trading

In all the years I have traded, I have learned a lot about Forex and trading. I have made profits only to lose it all in less than a day and sometimes a week. I have broken even several times, jumped to profits, and back again to losses.

It is kind of roller costa in Forex when starting. It is so much easier to be careless once you start making profits and go back to mistakes you had vowed not to make. You want to test so many things, and this testing and going back to bad trading habits is what causes losses.

For this reason, I usually advise traders to use both live and demo accounts. You can test some things in the demo accounts and use the live accounts for real trading or on days when you lack funds to top-up your live account.

Don’t just stick to live trading or paper trading alone.