How ‘Real' Can It Be?

At the time of writing this article, I am coming to the end of an extended tour of the USA having taught classes on both the East and West Coasts. Teaching the Online Trading Academy Core Strategy and working within real-time live trading environments gives the students the very best opportunity to see the strategy work in front of them and build their confidence to tackle the FX markets alone once class is over. While we are getting to know the material, we use the demo accounts to get familiar with the trading platform and practice the implementation of the rules of our patented Supply and Demand strategy. Typically as we get towards the end of the class, the question comes up about how long a student should stay trading on the demo accounts before going live with their own capital. Let’s look at the things we need to take into account.

First of all let’s explore why we should all start our trading on a demo account. The reasons are simple: If you are new to trading of any kind, it is vital to take advantage of the wide variety of tools available to you from the very start. If you have never used a trading platform before, then it can be quite daunting the first time you work with one. I remember feeling like I was staring at the flight controls in an airplane cockpit when I turned on a charting and execution program for the first time! It is vital that you know how to place an order in the market with ease, and then ensure that you know how to place a stop loss order to protect your capital, set exits to take profit at predefined levels and manage the position throughout the trade itself. It could cost you a lot of money if you place the wrong order and trading is hard enough without this happening, as well. I could tell you plenty of horror stories involving traders I have met forgetting to cancel a stop loss order after closing a winning trade, only to wake up the next day to find themselves in an open position and suffering heavy losses. To fully ensure that you can be confident with your execution system, it is necessary to practice order entry and the demo account is perfect for this task.

Secondly, a simulated account can be the ideal vehicle to test a trader’s strategy in a safe environment for the first time. When I teach a class, I introduce the students to a wide variety of technical tools and methods to trade with consistency and I have found that over time, we all gravitate to a preferred style which matches our personality. Discovering your ideal method of objective analysis and execution is a key requirement for any novice trader, and it is always a good idea to try out a variety of strategies to find out which is the right one for you. Again, the demo account is the perfect place to start the process, with no actual financial risk on the table. It is only after thorough testing and implementation of a setup that we can hope to gain confidence in our methodology, so it makes perfect sense to try this out in a safe arena. However, while the simulated account offers us a selection of advantages to aid our trading growth, it also suffers from the duality of providing a myriad of potential hurdles, as well.

Having taught over 600 students worldwide, I have practically lost count of the number of traders I have met who have suffered from the “Jinx Effect” of the demo account. Typically they have tested their strategy with great success on the demo account over a sustained period of time with very strong results, only to find that when they moved over to a live account, they failed to emulate the same outcome of results. This is by far a most common issue for the novice and the cause of this usually comes down to nerves and emotions. You see, no matter how disciplined they are with their trading on the simulated account, they ignore the fact that the trades are still not real and when real money is on the line, then emotions can easily get in the way. Usually the novice is not as confident about placing a trade as they were on the demo and ends up missing great opportunities due to a lack of confidence in pulling the trigger only to watch the market go off without them onboard. When they do finally place the orders, things then fall apart after a few losers and suddenly the tempo changes to the scenario of jumping in and out of the market recklessly in a desperate bid to claw back the draw-downs, resulting in far greater losses than were experienced in the safety of the demo account.

Another issue commonly found with more experienced traders is that of the fear factor which pushes them back to the comfort zone of the simulated account. Things can be going well for a while on the live account, with a period of consistent and profitable trading becoming the norm. Only one day it all changes and the trader’s “luck” suddenly seems to evaporate into thin air. Enter a run of sustained losses which force the speculator to switch off the live account and move back to the safety of the demo world. Now understand this, I am by no means saying that is a bad thing to do and we should all enforce the discipline to halt our activities and assess our technique during losing streaks. However, this can also become a double-edged sword if we are not careful.

There is the danger of stepping away from the plan and trying out a few new ideas on the demo which we would not normally do, which in turn can be damaging to the original plan itself. We have to understand that no system will give winners all the time and the worst thing a trader can do is change the rules in mid flow. The demo can also lure the trader into a false sense of security. When they go back to the demo, the emotions are easily removed and just like the novice in the early stages, they will be using a transparent confidence when pulling the trigger. After a few winners on the simulated platform, they go back to the live arena and then suffer from an inability to allow the winning trades to fully run, taking small profits in an effort to get a feeling of relief because they are no longer a loser. But as we all know, small losses are part of the game and if we don’t counter these with larger average winners, then our trading career runs the risk of stalling in the gates once again.

So how do we counter these flaws of the demo account? The solution is simple: Trade live, but with very small size. One of the greatest things about starting your trading career with a FX account, is that it offers so much flexibility in the size you can take on when you are trading. Forex trading has a distinct advantage over other instruments in the fact that traders can be very flexible with their position sizing. We can use either $100,000 full lots, $10,000 mini lots or a little at $1,000 micro lots. The pip value of the average micro lot is just $0.10, making these the ideal tools to get live with real money. As they say, it is best to have a little skin in the game to give yourself a real edge. Take a look at the diagram below to see just how competitive the margins can be as well:

As you can see, getting involved in the world of currency trading does not take a huge investment and offers the ability to get into the market at all price levels. Sure, if you are trading Micro size lots to begin with then you are not going to replace your short-term income and long-term wealth needs overnight but you will get started and begin to make progress in the right direction. The key is to focus on making the pips consistently first, then you can begin to build your position size accordingly. Take a look at the below example:

In the above chart an institutional level of demand was highlighted on the USDCAD which when triggered, rallied to the opposing level of supply for a gain of 220 pips. If this had been taken on a $10,000 lot, it would have resulted in a financial gain of $22.00, yet as the lot size increases, so the does the profit in dollars although the pip gain is the same. Once a Forex trader begins to focus on making pips instead of just making money, they can then develop the level of consistency required to increase the position size and in turn increase the money made as well.

You can open a Forex account on the FXCM trading platform with as little as a few hundred dollars. Why not try putting a little money on the line instead of a larger amount and feel the true effects of trading actual money? Of course, these are just small amounts of money at stake and I am sure you wouldn’t beat yourself up too much if you wiped out a $250 account, but at least there is real money on the line and this will help to maintain a realistic edge to the practice time. The best way to gain confidence is to get back in the saddle when you take a fall and experience the environment in its rawest form, as opposed to risking the hidden dangers of a virtual world.

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