Here’s a typical experience for a newbie trader.
You learn a trading strategy, apply it to a demo account (or paper trade it) and then take it live once he’s seen his virtual profits rack-up.
But as soon as REAL MONEY is dropped into the equation…problems start to arise.
It’s a strange phenomenon because in theory nothing has really changed. The markets still behave the same, the execution of trades is still carried out in the same way on the broker’s platform, the strategy rules are still valid.
So why don’t all traders make the move from demo trading to live trading and enjoy spectacular results?
It’s because of one thing you cannot afford to underestimate:
The mind-bending effect of putting hard cash on the line!
Think about it…
This is money you may have worked hard to accumulate. You may have become emotionally attached to it. And it’s money you probably aren’t really ready to risk in the markets.
The self-preservation instinct can sabotage a successful methodology. Trades are missed or taken without discipline, and you can become disheartened with real-world results pretty quickly.
But I think this happens only because so many traders miss going through an appropriate transition period.
Many traders try to go straight from using a demo account to a fully funded real money account.
The pressure to perform is too great – it’s like going straight from riding a bike with stabilisers to lining up with the Tour de France riders. Expectations are too high.
But accept you’re still fresh faced and learning, be prepared to take the odd little tumble in a safe environment, and your path to the big time can be so much smoother.
Instead of this:
Demo trading > Virtual Profits > Fund full size account > PRESSURE TO PERFORM
Why not try this:
Demo trading > Virtual Profits > Fund small real money account > Consistent Profits > Increase account size > Consistent Profits > Increase account size > CONSISTENT FULL SIZE PROFITS
I suppose it’s the natural human desire to make big money fast that gets in the way. But scale into your full size account incrementally and you’re protecting your trading bankroll while you harden yourself to real world conditions.
There is so much to be said for trading with real money – it’s a completely different world to demo trading, purely because of the mental aspects of assuming risk – but do expose yourself to it in a SMALL way first, especially since it’s so easy to trade from 10p per pip with most brokers these days.
Build up your resistance to performance-pressure gently and your probability of successfully transitioning into full size, real money trading increases exponentially.
But how do you know when you’re ready to move things up a notch?
Ask yourself these 5 questions whenever you consider increasing your trading account size
1) Am I sticking to my strategy rules without fail?
Be honest; if you’re flying by the seat of your pants and trading without a clear plan, sod’s law says the markets will bite at the worst possible moment – right when you’ve risked more money than usual. But it’s easily remedied: just make sure you have a clear strategy in place. You need to know exactly what to do next at all times and a good strategy plan falls under these 5 main headings: what to trade, how much to buy/sell, when to enter a trade, when to exit a losing trade, when to exit a winning trade. Make sure you’ve got all those points covered before taking on more risk.
2) Is my strategy delivering consistent profits?
If your strategy is unproven, or is going through a prolonged period of drawdown, throwing more money at it is not the answer. Backtest, tweak, go back to demo trading until you get it delivering consistent profits, and keep the rest of your powder dry until that time.
3) Am in control of my emotions when trading at my current size?
Any feelings of panic, extreme fear, aggression, loss of temper etc… will be amplified manifold when more money is dropped into the mix. Instead of increasing your trading size you should work on desensitizing your emotions at your current level.
4) Are trading results affecting my life outside the markets?
Are you taking your trades away from the screen with you? Is it affecting your mood, your relationships, your sleep patterns? If so, go smaller instead of larger. Scale your trading size down a level until it doesn’t affect you and work on sizing-up again from there.
5) Am I totally confident in my broker, the trading software I use, and any other tools I use?
Make sure you’ve got all other bases covered before risking more money. Make sure you can completely trust your broker, and that you’re happy with the charting software and trading software you currently use. Do a little audit of the tools of your trade and make sure there’s nothing that needs optimising or improving before injecting more bankroll into your trading campaign.
And once you’ve worked your way through that little checklist congratulations are in order: you’re treating your trading like a business and respecting your trading funds appropriately.
You DESERVE to be trading at larger size!