All the education in the world does not prepare you for trading live, I fully agree to that. And demo trading is not the same as trading live as there is no money on the line. I’m well aware of both those things. Loads of live traders tell me every day that although I might be doing well on my demo account, you do not have the same emotions as if you are trading live.
However, trading long-term on a demo account as I am doing right now definitely has some benefits for me personally :
– First of all, after having absorbed the materials of the training course I took, I had a good idea of what I was going to trade but back-testing just did not cut it for me. I have to admit that I am too lazy to go back into time to go and look for potential trade setups and see how they would have worked out. You can counter that by saying that back-testing gives you loads of experience in detecting harmonic patterns and can show you how your setups would have performed and that is true. There is not enough involvement or emotion in it for me though. In hindsight it’s easy to see that it would have performed well, but how would you have reacted while you are in the trade ?
– So instead of back-testing I decided to forward test my “trading plan”. To me it had lots of benefits, especially the emotional part that is lacking while back-testing. Sure, it takes lots more time before you have a confirmation that your plan works, but at least you get the feeling that you are really trading and not just looking at the charts for potential setups.
– While doing my forward testing I discovered that some of the things I was doing were just not working and I made a lot of mistakes like but not limited to : entering trades early, overtrading (placing too many trades), cutting profits short, seeing things that were not there, being biased about direction, accidently placing trades in the wrong direction etc etc. You name it, I’ve made the mistake. Good thing that I was not trading live or I would have blown my account several times.
– So while forward testing you start to try and eliminate mistakes and start fine tuning your trading plan. You start to learn what works and what doesn’t. Once I had a good idea of what worked I started to try and trade that consistently and you gain the necessary [b]confidence in your trading plan[/b].
– Then there are drawdowns, days that the market just seems to be against you. These days happen to all of us, experienced trader or not. However, if you did not gain the necessary confidence in your trading plan like mentioned above, chances are high that you’ll make many mistakes when this occurs. Changing your strategy, revenge trading, moving stop losses, increasing position sizes to try and recover what’s lost … been there, done that… and it does not work, it just makes thing worse.
– So stick to your plan, the one that has proven in the past that it works. What you can do to regain confidence is reduce your position size and keep trading your plan, at least if you continue to lose the amounts will be smaller, and once you see you are on the right track again you can start increasing position size again.
– If your state of mind is such that you can’t even trade your plan with smaller position sizes, just take a break from trading all together. Take some time to go over your trading plan, review how it worked in the past and what might be the reason why it’s no longer working now.
All the reasons mentioned were good enough for me to stick to my demo account for now and proved to me over and over again that this was the best decision I ever made. And as for the emotions involved in live trading here’s how I see that personally :
– I treat my demo account as if it were real money
– I am very competitive, so I want this thing to work so I can prove to myself and others that I am ready to start trading live
– I feel losses the way a live trader would feel them for the above reasons
– I trade my plan using the equity that I will start with when I go live, using risk management, money management, position size management just as if I would be trading live.
Yes, demo trading is and always is trading with virtual money, however the reality factor depends highly on yourself and how you consider it. Treat your demo account as if it was real money, follow your trading plan and gain confidence that it works (if it doesn’t go back to the drawing board). That, for me, is the best possible preparation before spending any money in the market.
Many have asked my why I am not trading live yet, the reasons above, and the Post Scriptum explain why. And I will continue to trade on a demo account until I have at least tripled my demo account of 5k USD. Don’t I feel bad about all the potential money I could have made if I were trading live ? My answer to that is that I would feel a lot worse about all the losses that I would have made if I would not have been demo trading. My favorite reply to the question above is I’m not in a rush to lose money. Does that make sense ?
PS: I have blown or reset several demo accounts before writing this article, if that would have been real accounts I probably would not be writing to you now, I would most probably have given up on trading all together. And that, in my eyes, would have been a real shame.