So now you have encountered a YouTube advert or some get rich quick scheme stating you can secure financial freedom and abundance of wealth by trading Forex, stocks or even more in limelight the misunderstood world of cryptocurrency? Believe me I’m more in tune about Bitcoin trading and the uses of block chains. Ok! So what’s the next step? Well usually you search on google and start gathering knowledge and ways to make money from trading. It’s a forgone conclusion that trading instruments such as forex, stocks, indices, options, mutual funds & cryptocurrency are very dynamic and present great opportunities to earn a second income and without question be a primary source of income.
As a complete novice trader your first mode of thought is too learn the basics of how the markets operate and how to actually place trades. To literally place a trade, you either have to open a virtual demo account with your desired capital deposit or live account with real money (see brokers). Having made numerous mistakes throughout my own trading journey and collating research from successful traders, I wanted to spend some thought to the major traps of demo account trading also highlighting the need to demo trade during critical times.
Demo Trading starting out- As a beginner to trading, you must apply basic concepts and strategies and slowly develop concepts like risk management and need for a trading plan. Common topics such as Support & Resistance, Fibonacci retracement, moving averages, price action trading, trading patterns, Japanese candlesticks etc. are normally in every trading course/syllabus (see Education for beginners). You initially learn how place trades with stop orders and limits, lot size allocation etc. Demo trading is there to apply the skills but in reality you can’t achieve monetary success. That’s why most people who start trading, believe that their results from trading with fake/virtual money will be the same as their results trading with real money. Sorry guys, just to let you know it’s not the case. In fact, it is never the case. The reason: Emotions.
Emotions! Emotions! Emotions! - The first and major sticking point is the element of emotions when it comes to demo vs live trading. A person’s emotions greatly impact their decision-making ability when real money is on the line. It’s difficult to gain discipline from demo trading because when you’re in a losing trade you can always get out the trade or just take the hit. After a couple of losses just hit the account refresh button and your account tops back up. Apologies for breaking the bad news it doesn’t work like that. You could blow out 7 accounts and have one account with huge profit gains, but that does not mean that you will be able to repeat the one big winning account again.
When your trading a live account your mind goes into a state of frenzy; doubts appear, indecision is the norm, should I? or should I not? are all normal emotions. A common trait in a successful trader is they have developed the ability to negate emotions i.e. they become emotionless and focus more on numbers. Every trader suffers from losses but the difference is they are more reliant on their formed biases. That is why they can take a loss on a particular trade and literally overcome that minor setback and continue to trade.
Demo Trading crucial to get you back on track- If you run into a bad spell with your trading, sometimes revisiting trading and getting confidence back using a demo account. Jack Schwager mentioned in his book Market wizards, that if you incur three straight losing trades you should resort to demo trading to build back confidence and a winning mind-set. When you get into a bad patch trading, the brain is focused on money that is being lost and mistakes can be made by not adhering to your trading plan and also imbalance in your emotions. Switching to a demo account relieves this pressure and reminds you that you can still trade well. The demo account is also good for working on new strategies without risking money.
Make your mistakes with a minimum deposit account- The general notion with new market participants is that you have to trade with a large account from the get-go to start making an income that presides your primary income. This is a common big mistake! It’s likely these individuals end up losing and blow up their accounts. To become a consistent profitable trader that is banking pips every month takes time (it does not come overnight). Not everyone can give up their day job and start trading full time. Therefore, if you feel like you’re not gaining an edge in demo trading then open a live micro account and deposit couple of hundred dollars or pounds.
Believe what you read, “Trade with money you can afford to lose”. Applying your strategies and technical/fundamental analysis to a small funded account will help you develop and nurture the emotional aspects to trading. Once you start making mistakes with real money, you must take notes and learn. Write down the solution and memorize it so that it does not happen again. These will in effect be the rules that get added to your trading plan. You must continue to evolve as a trader until you become more consistent in following your plan. It would require someone similar to a saint to completely eliminate new mistakes entirely, but this process will help you as a trader become more and more consistent in actually following your plan and not deviating away from your strategy.
Please bear in mind whatever your risk exposure is per trade i.e. 1% or 2% of your overall capital, you should have funds in your account to cover your margin of trading. Most brokers have a micro account option available where the absolute minimum lot size to trade is 0.01 lot that normally equates to 10 pence/cents (remember 1 standard lot (100,000 units of currency is $10).
Don’t forget the cardinal sins with live account trading- Let me assume that we now moved passed the obvious reason above i.e.: the demo account isn’t a 100% forecaster of live results. Let’s say that you have some idea of what you are doing and you are using proper risk management, you have a strategy that gives you an edge, and you have attained consistent results on your demo account. The reality is that it is much easier to follow those guidelines when there is no real money involved. A trader’s emotions are much, much stronger when trading with real money rather than a demo account. With real money you will be tempted to commit a number of trading sins:
- Moving your stop further away from the entry level.
- Exiting a position way before it reaches your profit targets.
- Being greedy and entering multiple positions whilst in you’re a profitable trade
- Increasing your lot size/position size after a successful winning trade
- Entering a trade that does not meet your trading criteria maybe to get revenge on a previous trade that was a bad trade
Whilst there are many more major sins to note to trading with real money, these one listed above are the most common. This is a very brief explanation of bridging the gap between a demo account and a live account. The best advice is to not focus on money as idiotic as it may seem but on risk management and application to remove the common sins committed in trading with real money. Trade and learn your craft with a small account as you will most likely commit the cardinal sins of trading.