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Fake accounts and real money

04/04/2011

I have come to realize two things in my trading and blogging life here. First is that I am terrible at predicting in my previous post what I will feel like writing about in my next, and second, that trading a practice account is almost nothing like trading a real account.

But in my case maybe it should be.

I have mixed feelings about these magic little marvels. They’re great, you can start off with an account balance between $10,000 – $1,000,000 and if you triple it or blow it, at the end of the day, you hit the magic little reset button and you’re back to square one. While sitting at our desk in our bathrobe and slippers we begin to fancy ourselves as the next Soros. We’re brilliant traders. These miracles of fictitious finance stroke the ego because they take the bad emotions out of the game and make even the most novice of traders think they’re entitled to few grand a day.

That’s the key to real trading though isn’t it. In a practice account you say hey, I lost $10K yesterday in my trading, but that’s ok, I was up $25K the day before and I’ll probably be up again tomorrow. So long as we’re not trading recklessly, that’s great and hopefully we can transfer some of that fake success into solid financial gains.

Enter the real world of trading:

It isn’t like the practice accounts. There is no reset button. Sure, entries and exits, stops and limit orders are generally about the same (though that depends some on your broker doesn’t it). The charts still move the same, the ma’s and fibs still come in at the same levels. So we ask why aren’t we making any money? Why is my account going down? I don’t get it! This is frustrating! Trading sucks!!!

There are a few problems. First is that emotional aspect. Yes, everyone knows trading is emotional, everyone knows that if you’re emotionally attached to the money you’re making or losing then you’re trading too big. But to “know” these things and to apply them to our trading are two different concepts.

Second, (and basically a subset of the first) we aren’t trading the same. We make subtle changes in our trading style that skew the results. We are too conservative with our stops, or maybe too generous. We are more cautious in entering a trade and too fast to exit a winning one. Maybe we’re too slow at exiting our losers. (After all, price is going to come back…. I think… I hope…) Some of this probably isn’t conscious for the new trader.

Don’t get me wrong, paper trading is a good way to learn the ins and outs of the game. You learn the functionality of the platform and some of the general concepts. You can test different trading styles and systems and find out what works for you, but be careful here that you don’t change what you’re doing as soon as you go into the real world. You can learn money management, but it’s easy to overlook these rules when real money isn’t involved.

I think, as with many things in life, you need some skin in the game to know what it’s like to play. I can read all day about how to fix a car or make a bookcase, but until I turn on the table saw and get my hands dirty, I don’t actually know what it’s like. Even that doesn’t make you qualified to be a mechanic, but you get a better flavor of what you’re in for.

Paper trading (at least when day trading forex is concerned) is a good way to learn the ins and outs of the system but a bad way to learn to trade. For anyone looking at trading, I would recommend paper trading for maybe two or three months tops. After that, put it away and don’t look back for a while. Take some true risk capital (whatever that may be $100, $1,000, $10,000) and learn what it’s like to be down a hundred pips. Try not to blow the entire account, but don’t be surprised if you do. Once you’re in the game a while, you’ll realize that risk capital isn’t the balance in your account, but rather your maximum allowable exposure in open positions at any given time. Today, I will risk x% of my account. But, in this account, your risk capital is your account. (More on this in a later post)

Why do I say all this?

I was going through some old files in my trading folder and came across one of the last practice accounts I played with. This one was fun, and it was by no means my first account. I’d been trading live before it but wanted to see what I could actually do in 4-6 weeks. Prior to yesterday, I’d forgotten what it was like to make truly obscene returns.

Would I trade this in real life? No of course not. Should I? If I can repeat these results, then yeah, probably. (that being said, the only thing that I trade differently between this account and my real ones is the position size. I had trouble getting excited making or risking a percent of the account that is generally considered reasonable)

So, learn to trade with a paper account, then go into a real account and learn that all you really know is how to open and close positions. Make and lose some money, then lean what it’s actually like to trade. I go through this learning process every day whether or not I place a trade.

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3 Comments
  1. Hitesh permalink

    It’s excellent article. Thanks for sharing it, Dear. I would like to put your advise in real life.

    Thanks Again.

    cheers !!! 🙂

  2. Excellent post! I just got out of my 3-month demo account experience, and this is the first week trading live for me. Have a mentor that is guiding me through risk management/position sizing/and some strategies but they are all trend-based and as such I haven’t been able to find a trade all week! Anyways, that this post was quite valuable, keep up the good work!

    -el matador

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