The Benefits of Using a Crypto Trading Simulator Before Investing

Introduction

In this article, we will take a deep dive into the world of trading simulators and how they have been adopted within the emerging cryptocurrency asset class.

In cryptocurrency, they are referred to as crypto trading simulators. They imitate real-time trading conditions and allow beginners to familiarise themselves with the various trading platforms and the cryptocurrency market. Hence, if you are keen on learning cryptocurrency trading the right way, these ingenious platforms will be absolutely essential to avoid unwise trades.

We will tell you why experts and beginners alike should use trading simulators, their history, pros, cons, and highlight some of the market’s best simulators.

The History of Trading Simulation

To ‘simulate’ is simply to imitate a process of the activity. Various simulations are pretty common in places such as aviation courses, defense drills, and the like. But it is also widespread in more relatable scenarios such as neighborhood fire drills, mock examination tests.

The exercise essentially seeks to imitate a real-life situation without all the stakes that come along with a real-life situation.

The idea is that being exposed to a simulation of activity helps prepare someone emotionally, physically, or even psychologically for the actual event when it happens.

Given that the trading environment is often unpredictable, traders sought to better prepare through simulations. 

However, trading wasn’t as automated as it is now. Things used to happen manually in the 20th century and earlier, which brings us to the first method of simulated trading that was applicable at the time.

Method 1: Paper trading

Paper trading is, as the name suggests, ‘trading on paper.’ The trader would write down their entry and exit positions on a piece of paper.

By keeping a record of these paper trades, the trader would test and analyze a trading strategy to see its performance compared to actual trades through a broker. Once a given strategy’s performance is consistently replicated many times, the trader would then be confident enough to use real money to place bets.

Benefits of paper trading

• Practice. Paper trading offers a trader the much-needed training to try out a strategy, tweaking, and learning what works and what doesn't. It is ideal for new traders, but this method is also quite common with seasoned traders before the proliferation of computers.

• Zero risks. If you don’t bet your money, then you can’t lose it. By recording hypothetical trades on a piece of paper, a trader can watch how a trade will work out if actual money is invested. Once the trader is satisfied that the strategy is solid enough to be replicated in an actual trading environment, they would use it to make real-money trades through a broker.

• Emotional well being. Based on the previous point, a trader’s emotional instability is often attached to the amount of risk they are taking. By getting rid of the risk, a trader effectively gets rid of emotional instability, leading to more confident trades once a strategy is proven. Emotion management is crucial for new traders.

Limitations to paper trading

• Unrealistic trade assumptions. Using paper trades does not simulate the actual picture of the trading environment. Typical trading factors such as the application of trading fees and slippage are not taken into account when paper trading. Commissions and fees eat into trade returns, while slippage may go either way, either causing a gain or a loss to the trader (slippage is a situation where there is a discrepancy between the intended trade price and the actual execution price). This is caused by the delay between when the trader makes a trade request with the broker and when the broker actually fulfills it. In this time period, the asset price may have moved in or against the trader’s favor.

• Manual process. The paper trading process involves picking a stock or asset and analyzing it manually, then choosing an entry and an exit point. The trader would perform the profit calculations manually, and record stops on the piece of paper. All this was tedious work that limited the number of assets in which a trader would ideally invest.

• Performance tracking. Using pieces of paper to record trades may seem easy, but the hard part comes when you have to track the trades and create performance metrics and charts. Keeping track of the pieces of paper and the trading times of every trade could prove challenging to most paper traders, who would then abandon the practice altogether.

• Emotional disconnect. Being emotionally involved in your trades is often bad, but this is only to a certain extent. Too much emotion makes it easy to be shaken off a trade and not adhering to a trading plan. It takes a lot of discipline and practice to master emotions when it comes to trading any asset. However, since paper trading eliminates emotions from the equation, a beginner trader is not well prepared for market volatility, leading to market indiscipline and losses.

Paper trading is still used today due to its simplicity; however, there are much more efficient methods of practicing trading or trading strategies, as we will discuss below.

Method 2: Spreadsheets

Following up on the paper trading technique, traders sought to find better ways to keep track of their simulated trades. In comes the use of spreadsheets, that refers to a computer application created to analyze and store data in tabular form. Spreadsheets were launched in the late ‘60s as enterprise level software applications used on mainframe computers.

The now popular Microsoft Excel spreadsheet software was launched in the early ‘80s and has, over the years, grown to become the most dominant spreadsheet application in the market.

The use of electronic spreadsheets has grown with the growing popularity of microcomputers and personal computers over the past 50 years. They have made it much easier to automatically capture trade data, record it in an intuitive interface, and create performance charts.

These electronic spreadsheets offer better and more user-friendly ways to track, analyze, and evaluate trading strategies’ performances.

Advantages of using electronic spreadsheets

• Capture more data. Traders using spreadsheets to simulate trades can track more data points such as time of trade opening and closing, profit margins, stop placements, and anything the trader deemed necessary.

• Semi-automation. Electronic spreadsheets make it easy to perform some tedious tasks using paper trading, such as methodology performance. With spreadsheets, it is easier to create charts and make projections. The expanded data points provide more information about the trades, and through critical analysis, traders can make better decisions regarding their strategy.

• Standardization. With the launch of electronic spreadsheets in late ‘70s and early ‘80s, it made it easier to standardize data collection and analysis. It also made it easier for trainers and tutors to teach their students how to trade. Using standard spreadsheet designs, these students would then take advantage of tested and implemented data collection and analysis techniques without using arbitrary methods used with paper traders.

• Increased functionality. Over the years, spreadsheets have become even more capable, allowing users to pull data from various trading platforms using data mining functions. Now, traders using electronic spreadsheets to test out their methodologies can do so with the click of a button giving them access to historical data that was previously hard to get. With this kind of historical data, traders are able to backtest their trading methodologies before implementing it to real-money trading.

Disadvantages of using spreadsheets

As the spreadsheets became more widespread, traders realized that they had their limitations, just like paper trading. These were:

• Steep learning curve. As opposed to paper trading, which is essentially writing your entry and exit positions on a piece of paper, spreadsheets introduce standard data collection and manipulation methods. It means that traders have to learn first how to use spreadsheets to make the most use of them. This has become more challenging with spreadsheets now becoming more capable with added functionality than ever before.

• Cost. With the popularity of electronic spreadsheets, various software applications with spreadsheets capabilities began popping all over the place, and most of the good ones were not cheap to buy and had a steep learning curve. This has deterred new users from adopting them.

The natural progression in using electronic spreadsheets led to the next level of trading simulation - trading simulators and demo accounts.

Method 3: Trading Simulators and Demo Accounts

The word demo is a truncation of the English word ‘demonstration,’ which means to show how a particular machine/tool works or how a skill is implemented to achieve desired results. 

So demo accounts are just that - demonstration accounts. They are accounts created by brokerage platforms intending to show how their real-money trading platforms function. However, most importantly, the concept of demo accounts was introduced to entice new customers to try out their platforms, which would ideally lead to signing up to use their real-money trading platforms.

Demo accounts mimic the real-money trading platforms with subtle differentiations such as eliminating trading fees, eliminating lagging order execution commands, and using ‘fake’ funds.

The demo account concept became extremely popular as a training environment not just for beginner traders and experts alike who needed an efficient way to test out methodologies before adopting it to actual real-money trades.

Not surprisingly, features within demo accounts are limited to those already offered on affiliated live trading platforms, and most brokers offer proprietary trading experiences. As traders’ needs evolved, platforms where they would experience complete functionality and all the trading assets included became more sought after. 

This led to the development of trading simulators, which effectively were independent platforms allowing people to connect to various broker accounts using APIs, importing their trading histories and the order books of these platforms. With this data, traders could vigorously test out their methodologies on a broader range of scenarios. They were able to implement back-testing techniques and could be able to make real-time trades on the simulated platforms, something that was not possible with the use of paper trades and spreadsheets.

With the popularity of cryptocurrency trading, the use of crypto trading simulators has become even more pronounced, given the novelty of the assets traded. Several users on the traditional markets have shifted to trading cryptocurrency assets and using simulators to understand how crypto assets are traded has become a necessity.

Independent platform simulators, i.e., platforms not associated or affiliated with a real-money trading platform, are the latest trend in cryptocurrency trading simulators. An example would be CryptoParrot.com, a leading social-based cryptocurrency trading simulator. These platforms’ selling proposition is to simulate actual trading conditions offering features such as real-time trading data, charting tools and reporting tools.

Features of Cryptocurrency Trading Simulators

• Real-time pricing data. It has become a given that all trading simulators will come with real-time prices. Even though historical data is still valuable, most traders trying out new methodologies tend to test out their theories using real-time data instead of back-testing techniques.

• Play money. This is the capital deposited in a new account for the user to perform simulated trades. It could have different names, but it essentially serves the same purpose. Account-holders will use the capital to make trades in their simulator apps or web interfaces. Often, the play money is much larger than a typical account user will trade with once they move over to the real-money trading interfaces.

• Reporting. This is perhaps the essential feature of assimilated trading accounts. Users need to know how their trades play out and their trades’ performance to know whether a methodology is viable enough to be adopted over to the real-money platform. Some platforms will offer charts, graphs, or just simple percentage variation tickers next to their trades.

Advantages of simulated trading accounts

As compared paper trading and the use of spreadsheets to test out trading methodologies, using simulated trading techniques offer the following advantages:

• Mimics real-money trading. Every (crypto) trading simulator that is worth its weight in salt needs to have this feature, at the very least. It is the biggest differentiator between simulators and spreadsheets or paper trades. With simulators, traders can execute their ‘fake’ trades similarly as they would on the real-money platform. They have access to real-time prices and basic technical trading tools such as charting software.

• Beginner-friendly. Compared to spreadsheets, user interfaces of simulated accounts are much easier to understand and especially for beginners. Most simulators adopt contemporary software development methods that prioritize usability over a functionality to entice most beginners to sign up. However, these accounts are extremely capable not to downplay the advancement of features available in trading simulators.

• Community. This is not a common feature in most trading simulators (let alone crypto trading simulators), but it is a nifty feature that needs to be adopted by most. Previously, using spreadsheets and paper trading, it was hard to share trade setups with colleagues unless you found a way of sending them either physically or electronically through email. With the latest crypto trading simulators, it is now possible to take advantage of communities to learn how to trade.

Leading trading simulators, such as CryptoParrot, allow beginners to watch experienced traders as they make their trades and learn from their methodologies. Additionally, they can implement the same setups within their accounts and see results for themselves.

Within a community, you can ask questions on trade setups while also offering others the same. It has never been easier to learn how to trade.

Comparison: Real-Money Trading Vs. Simulated Crypto Trading

When starting in trading, it is encouraged to begin your journey using a trading simulator. Why is this the case? Isn’t it better to learn as you earn with real-money trading?

Real-money and simulated crypto trading are not unlike one another. They are very similar with subtle distinctions and these distinctions make it better and safer for a beginner to start with the simulated platform.

Some simulators, especially the independent simulators such as CyptoParrot, may offer more features as compared to some brokers’ real-money trading platforms. These simulation platforms have been in the business long enough, iterating and improving on their craft.

The benefits of cryptocurrency trading simulators

Despite their similarities to prior forms of simulation, such as paper trading and spreadsheets, using crypto trading simulators has the following benefits.

• Practice. As mentioned before, using simulation enables both beginners and experts alike to get a feel of what it is like to trade using a particular platform. For beginners, they learn how to trade effectively, while for experts, these platforms provide a safe place to try out trading methodologies.

• Emotional decoupling. This is especially important to master as a novice trader and maybe the most challenging thing a beginner has to do during real-money trading. So not having to deal with it at the beginning will allow them to focus on improving their craft and having to deal later with decoupling their emotions from their trades.

• Enough ‘play money’. Often, the funds available to ‘play’ in a demo account are way more than a beginner may have to start with trading. Not just that, but also when using the real-money trading interface for the first time, it can be intimidating to beginners who are risk-averse who may want to open meager positions to play it safe. It reduces their possible profits in the chance that their trades work out as expected. Having more than enough starting capital to play within the simulated environments allows them to build confidence to trade with real money for the profits.

• Confidence. We just mentioned it above, but it is worth repeating that having the boldness to go big on a bet doesn’t just happen when starting. It needs practice and having a safe place to play out trade methodologies goes a long way in helping novices work up their confidence to start trading on the real-money platforms.

• Free to join. Crypto trading simulators are free to sign up and start trading. Sure, some simulators charge a fee, but most are free. For instance, CryptoParrot has no entry charges, and once a user has signed up, they have access to all features available on the platform. They can learn from other community members, copy trades, share methodologies, give and receive critique, compete against other members, and so on.

Conclusion

There is so much value an individual can get from cryptocurrency trading simulators, and hopefully, you have learned that today. To try out simulated trading, open an account with CryptoParrot today, it’s completely free.

Instead of jumping headfirst into the world of trading cryptocurrencies with real money, try dipping your feet first to measure the ‘depth’ and ‘temperature’. It may just mean the difference between achieving your goals and losing your whole investment.