Paper Trading: Gain Experience Without the Risk

Paper trading is a great way to practice trading options while using fake money.

The more experience you have with paper trading, the higher level you’ll qualify for when using real money.

However, you should be aware that paper trading does not exactly mimic real trading. TD Ameritrade’s thinkorswim platform, for example, explains that their paperMoney version differs from their live version in these ways:

  • There is no after-hours trading, so your paperMoney orders are filled only during U.S. trading hours. Also, orders such as MOO (market-on-open) and MOC (market-on-close) are not supported in paperMoney.
  • paperMoney market orders are not real so they are not actually sent to or filled at a securities exchange, but a theoretical fill price is assigned to an order based on the actual fill prices the underlying security traded at during the time interval that the paperMoney order is placed. It’s not an exact science, but for stocks, paperMoney orders are generally filled at the LAST traded price. For paperMoney option spreads, it is typically the mid-point price between the bid and ask of each option leg (i.e., the “mark”). Depending on the option you are trading, this method may range from realistic to extremely unrealistic.
  • Options in paperMoney are never exercised early. This also means that you will never be subject to early assignment in paperMoney.
  • Dividends and other corporate actions are not applied in paperMoney.
  • As soon as the market opens, you may get filled at the spread’s “mark” on paperMoney. Based on real market liquidity, getting fills at the “mark” with real money just after the market opens may not be nearly as easy.
  • Trade size is not a factor in paperMoney the way it is in real life. Therefore, if you are practicing with 10,000 contract orders in paperMoney, you are likely to experience far better fills than what you could expect in real life on orders of that size.
  • You are typically a more objective trader with paperMoney. Once real money is on the line, your emotions return to possibly alter your decision-making process.

Besides thinkorswim, several other brokers preferred by options traders for trading real money also allow paper trading, so you’d want to ask them directly how their paper-money process differs from using a live-money account. (At Investing Daily, we’re not affiliated with any broker and don’t recommend one over another.)

Usually you’ll have to open and fund a real account with a broker that offers paper trading, so you may want to Compare Options Trading Brokers to see which will be the best fit for you.

Here are the options brokers that we know of that offer paper trading:

Whether you get started using real funds or simulated funds, a glorious adventure awaits you. Happy trading!