Terms Beginning With 'p'

Paper Trading

  • January 07, 2020
  • Team Kalkine

Trading is an economic activity which involves buying and selling of goods and services in exchange for money. In the financial market, trading is the same concept; the only difference is it deals with securities, currency, commodity etc.

What is the Significance of Paper Trading for Beginners?

To trade successfully on a consistent basis is not everyone’s cup of tea. Often at times, new traders end up blowing up their entire capital quite early. This happens due to a lot of reasons which are difficult to rectify early on and at once. These hindrances could be lack of knowledge, lack of patience, no prior experience and inability to control the two primary emotions, fear and greed which eventually drive the market etc.

To counter these issues gradually, paper trading is often recommended, especially at the very beginning stage.

What Do We Mean by Paper Trading?

Paper trading, as the name suggests, is a dummy form of trading in which the trades are not executed on an exchange but are written on a paper, which allows investors/traders to hone their trading skills without putting a penny at risk. These trading skills could include the timings of entries and exits, position-sizing, risk management strategies etc.

There is no capital at risk as the trades are only written on paper. But the simulation of these trades is done in accordance with the actual price that is being quoted on the exchange.

With all the hypothetical positions, portfolios and risk but with real price fluctuation, an aspiring trader can learn a lot of things which a mere theoretical book cannot teach. Like any other skill in life, one needs to practice trading in order to improve upon the skill. Paper-trading solves this purpose of practice without putting actual money at risk.

What is the Purpose of Virtual Trading – Technology based paper trading?

With the constant upgradation in technology, nowadays there is an improved version of paper trading called virtual trading. The underlying concept remains the same, to help new traders to practice and improve their trading skills in a simulated environment but with the integration of technology.

In conventional paper trading, the trader continually needs to keep updating prices manually. This could be a tedious task if the frequency of trades is high, especially for intraday trading. Also, a manual log of all the trades needs to be created if the trader wants to look back at the past few trades for any analysis purposes.

Another drawback shows up in the errors. While manually updating prices or another field like net P&L etc. there is a good chance of making a few errors which could lead to the false representation of the P&L.

All these issues are being taken care by technology-based paper trading where all the data feeds are being updated automatically, and live prices are updated. Some of these virtual trading platforms are free while others with advanced features like graphical representation of data or calculation of some advanced metrics etc. can be paid once.

What are the Advantages of Paper trading?

A few of the advantages of paper trading for which it is considered to be one of the best ways to learn to trade in the beginning phase are;

  1. Testing of a strategy

Before deploying a specific strategy, it is always advisable to first test it. Paper trading helps the trader to test his strategy within a simulated condition which is identical to the live market conditions. This helps to ensure whether the strategy would work or not in the live market. Also, if the strategy fails to work, then the loss will only be virtual as no real money is involved.

  1. No additional infrastructure required

Virtual trading platforms are quite easily available nowadays. Even some brokers have started to offer this service to their clients. Most of the platforms are free and only requires a sign up to start doing paper trading. No legal documents are required to open a virtual trading account unlike a live trading account.

  1. No stress

Stress is something which even the best of the traders goes through, especially during the period of losses. As with paper trading, no real money is involved; hence high stress is generally not there.

  1. Confidence Boost

After a few months, once the trader gets the hang of his strategy, understands the shortcomings of his methodology and strengths and also gains relevant experience, he can confidently start to trade with the real money in the live market.

What are the Disadvantages of Paper Trading?

Despite being such a helpful and effective way to learn to trade, it has some drawbacks too, which must be taken into consideration while paper trading.

 

  1. Ignores some associated cost

While paper trading helps to keep track of P&L of individual positions but there are some exclusions from it like brokerage and slippages. Slippage is the difference between the bid and ask price which can reduce the P&L by a meaningful amount, especially when the market is illiquid.

As different brokers charge different brokerages, it is not possible to incorporate it in a trading platform, although it can be written manually.

  1. Ignores emotions and psychology

If topmost traders of the world were asked to define the single biggest factor which sets a successful trader apart from the crowd, psychology would be heard from most of them. Trading psychology alone can turn a good trading strategy or a specific analysis into a bad one, the sole cause of which is the involvement of money.

Whenever money is at risk in any decision, most of the time, the emotions take over and hamper the ability to think clearly. These two emotions are Greed and Fear.

As there is no money involved in paper trading, these emotions are generally muted and may go onto a completely different level while trading live with real money. This may create a humongous difference between the performance in both the scenarios.

Is there any alternative to paper trading?

To eliminate the drawbacks of paper trading, some traders start directly with the live trading with real money but with a very less quantity. The quantity is so small that the P&L fluctuation is almost meaningless.

This is as good as paper trading but also eliminates the drawbacks of paper trading as trades are executed live on an exchange which accounts for brokerage and slippages and gives realistic P&L figures. Also, money is involved, which helps to practice emotional stability and psychological resilience.

An alternative to traditional stock exchanges, dark pools are referred to private forums or exchanges formed for trading of securities. They offer an opportunity to investors to make trades without revealing their intentions publicly.

What is the Dark Web?  The dark web is one such portion of the World Wide Web which is not accessible by regular search engines. The dark web is considered a hotbed for criminal activities, and it is much more than that. Various websites exist on an encrypted network inside the dark web. Standard web browsers and programs cannot find these websites. Once inside the dark web, different sites and pages can be accessed like one does on the web. Scientists believe that the internet we see is only 4% of the entire ocean of the web, meaning the 96% consists of the "Deep and Dark Web".  The user interface used in the dark web is usually internet-based, but it utilises special software which is not part of the standard ones. There are dozens of web browsers to surf the internet, but they all work in the same way. These standard browsers use ports and protocols to request, transfer and view data on the Internet. The website you access may look familiar, but as you enter, it may be illegal or something familiar but otherwise not monitored by anyone else. Therefore, the deep web and the dark web are famous for being anonymous. Also read: Cyber Espionage Campaign: Strings that tie China, Australia and the US How to access dark web browser? In order to access a few areas which are restricted, the user may need a password and a process to follow. A special software called TOR (The Onion Router) or the Freenet has these non-standard connections. These browsers are unlike standard internet browsers and have a process to access. They allow the users to browse around the dark web and are focused on keeping the user identity anonymous. If hacked or accessed, the regular web browser can easily provide user information such as who the user is and whereabouts. Though the dark web is providing 100% anonymity, federal agencies have been successful in tracking down criminal activities on the dark web. It is often said that the person you are talking to on the dark web could either be an FBI agent or a criminal. Image: Kalkine   What happens inside the world of the dark web?  The dark web is famous for allowing sinister activities, but many users go on the dark web to access information which otherwise may not be accessible on standard internet. Such as users from extremely oppressive governments who cut access to the world for their citizens. Unfortunately, such confidential environments also provide open platforms to criminals, terrorists and other such individuals involved in illegal activities.   Hence, experts advise users to not access the dark web even out of curiosity as it is a lawless environment. There have been many incidents where innocent, curious users were trapped and forced to get involved in criminal activities or their digital devices hacked and compromised without their knowledge.  A study conducted by a University of Surrey researcher Dr Michael McGuires in 2019, Into the Web of Profit, shows that the dark web has become worse in recent times. Since 2016 of all the listings on the dark web suggested, 60% could harm companies. Everything illegal and criminal can be found on the dark web, it also has other legitimate options such as chess clubs or book clubs, but because of the anonymity, the user will not know whom he/she is interacting with. Inside the dark web, anonymity and lawless nature make the crimes which exist otherwise in our society hard to trace.  The payment procedure inside the dark web is also different from the World Wide Web. Most often, Bitcoin and Monero cryptocurrency are used for the transactions.    RELATED READ: Knock Knock! Cybercriminal at Your Doorstep   What’s the difference between the deep web and dark web? The dark web is part of the entire deep web and is hidden from regular browsing access. Most people confuse the deep web and the dark web as one entity. It is not. The deep web content includes anything hidden and restricted behind the security wall such as content which otherwise requires paywall or sign-in or blocked by the author. Content which cannot be easily accessible on regular internet such as medical records, membership websites, paid content are available on the deep web; hence it is also called Invisible Web.  No one really knows the total size of the internet, but the experts believe that the standard World Wide Web consists of only 4% internet, the deep web consists of 90% and dark web consists of 6% of the entire internet.  ALSO READ: Technology has changed the way we work amid the COVID-19 crisis: A look at in-demand technologies Image: Kalkine     Also read: It happens again, NZX being bullied by Cyber-attackers- Down for the fourth day   What kind of risk companies face due to the dark web?  The Into the Web of Profit report listed below threats various organisations around the world are facing, especially the ones who have weak or insufficient cybersecurity measures.   Malware attacks Distributed denial of service (DDoS) attacks Botnets Trojan, keyloggers, exploits  Espionage  Credentials access  Phishing  Refunds Customer data Operational data Financial data Intellectual property/ trade secrets    Also read: Cybersecurity and the Requirement of a Resilient Environment in Australia  Are there advantages and disadvantages to the dark web?  The dark web provides complete anonymity, the users get complete privacy to perform any activity, be it illegal or legal. Many countries in the world still have authoritarian regimes offering no civil rights to their people. To such oppressed lot, the dark web provides an opportunity to access news, information, data and also express their views. The dark web is also a perfect place for law agencies to map criminal activities while being undercover. It is also easy to commit gruesome crimes through the dark web as it is complicated and lawless. Criminals can easily use the dark web to compromise someone's privacy, steal data or private information or even hire someone to commit murder.  Do internet users need to be concerned about the dark web?  The simple answer is no unless the user is using the dark web. Study says that most young people visit the dark web out of curiosity. They do not want to indulge in any criminal activity but want to see how the hidden and secret world of the dark web operates. And that is where the possibility of the electronic device IP address getting hacked by other criminals to perform their criminal activities lies.  The earliest use of darknet dates back to the year 2000. Freenet was created at the University of Edinburgh based on a student research paper. Ian Clark wrote the paper in 1999 on the possibility of such an encrypted internet base. Freenet was created to oppose censorship and provide a platform for free speech. The most powerful dark web is TOR, and it was created by the United States government to have a secure encrypted communication in case of emergency and complete disaster. Even today, many law agencies are secretly active inside the world of the dark web to gain access in the criminal world and stay one step ahead.

Darvas Box system Every great trader/investor in the history of the markets had a specific method to approach the markets, which eventually led them to create a good fortune, Darvas Box system is one such method. It is a trend following strategy developed by Nicholas Darvas in the 1950s to identify stocks for good upside potential. This is one of the few methods to trade the markets which uses the combination of both the technical analysis and fundamental analysis for a much more refined decision.  The fundamentals were used to identify the stocks, and technical analysis was used to time the entry and exits. Who was Nicholas Darvas? Nicholas Darvas was arguably one of the greatest stock traders/investors during 1950s – 1960s, but surprisingly he was a ball dancer by profession and not a professional stock trader. Even while trading and building his fortune, he was on a world tour for his performances in many countries and took up trading as a part-time job. In November 1952 he was invited to a Toronto Nightclub for which he received an unusual proposition of getting paid in shares by the club owners. At that time, all he knew was there is something called stocks which moves up and down in value, that’s it. He accepted the offer and received 6k shares of a Canadian mining company Brilund at 60 cents per share, with the condition that if the stock falls below this price within six months, then the owners would make up the difference. This was the introduction of a professional ball dancer to the stock market. Nicholas Darvas couldn’t perform at the club, so he bought those shares as a gesture. Within two months, Brilund touched $1.9, and his initial investment of $3000 turned to $11400, netting in almost three times of his investment. This triggered a curiosity into the stock markets, and he started to explore trading. Origin of the Darvas Box theory Initially, he was trading on his broker’s recommendation, tips from wealthy businessmen, he even approached some advisory services or any source that he could get his hands on for the tips, but all led him to losses. After losing a lot of money, he decided to develop his own theory, and after a lot of trial and error, his observations and continuous refinements he eventually invented his theory “The Box Theory”. So what exactly is the Box Theory? Fundamentals Analysis As stated earlier, the box theory uses a judicious bend of both the technical and fundamentals. Darvas believed that in order to spot a good stock or even a multibagger, there should be something brewing up in the respective sector as a whole or some major fundamental change in that specific company. Generally, the fundamentals that Darvas used to study were on a broader sector level, and not the company-specific fundamentals. Even for the specific company Darvas used to look from a general perspective like, is the company launching a new product which could be a blockbuster hit. He completely refrained from looking at numbers and financial statements as his initial experiment with ratios and financial statements didn’t yield any good result. To know more on the three financial statements read: Income Statement (P&L) Balance Sheet Cash Flow Statement Technical Analysis Darvas was a big believer in price action and volume of the stock. He believed if some major fundamental changes were to take place in a company, this soon shows up in the stock price and its volume of trading as more people get interested in buying or selling the stock. With his observations here realized by just observing the price action, he can participate in the rally which gets triggered by some major fundamental development without actually knowing about the change. Using the box theory, Darvas used to scan stocks based on rising volume as he needed mass participation in the rally. Also, he only picked up those stocks that were already rising. His theory is all about “buy high, sell higher” instead of the conventional belief of “buy low, sell high”. After the stock satisfies both the parameters of increasing price and volume with major underlying fundamental change, Darvas looks to enter the stock. Good read on momentum trading. How and where to enter? Major part of the box theory is based on entry and exit levels. To enter a stock, Darvas looked for a consolidation phase preceded by a rally. A consolidation phase is the price action wherein the price moves up and down in a tight range, that is, a non-directional move. He would then mark the high and low of the consolidation phase with the horizontal line, essentially making it a box-like structure, hence the name “Box Theory”. The high point is called the ceiling, and low is called the floor. Whenever the stocks break above the ceiling, Darvas would look to buy one tick above the ceiling with one tick below floor as a stop-loss point. Pyramiding Darvas discovered early on, in order to become successful in the market your winning bets should yield much more profit than the loss in the losing bets. This led him to do pyramiding in his winning trade, which is clearly defined in the box theory. Pyramiding means to increase the existing position if the stock is going in the favour, which leads to a much higher profit in the winning trades. According to the box theory, the repetition of the entry criterion is the new signal for adding onto the existing position. In other words, after a position, if the stocks stage the same setup, that is, a consolidation after a rally, then the break above the ceiling of this new box would signal to increase position with the revised stop loss of 1 tick below the new floor. In any case, whenever the stock falls below the current floor, the entire position would we sold off at once. This is the only exit condition in the box theory, and there is no method of booking profit upfront as Darvas believed in holding on to a rising stock. The only way to book profit is to let the stock to take out the revised stop loss.

An instruction given to a broker from a trader to sell or buy a specific asset at a certain price that expires at the close of trading session if not completed, is termed as day order. A day order expires if the specified price is not met till the closing of trading hours.

We use cookies to ensure that we give you the best experience on our website. If you continue to use this site we will assume that you are happy with it. OK