GLOSSARY // Risk & Psychology
Paper Trading
Paper trading is placing simulated trades with fake money against real market quotes, used to test a strategy or platform before risking capital. Every major broker offers a simulator, and it is the standard way to learn order entry without paying tuition to the market.
The simulation flatters results in two ways. Fills are unrealistic — a simulator fills a limit order the moment price touches it, while a real order sits behind the queue at that price and often only fills when price is blowing through it. And there is no emotional load: sizing up after three fake losses costs nothing, so the discipline problem that ends most trading careers never gets tested.
A trader paper trades a breakout system for 100 trades: 60% win rate, +0.4R expectancy. Live with real money, the same setups run 48% over the next 100 — entries chased a few cents late, limit exits unfilled at the top tick, and two revenge trades that the simulator version never took. The strategy did not change; the fills and the trader did.
Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.