News & Updates

On demo trading and trading contests

There’s a post on one of the BabyPips blogs today about how you can take demo trading more seriously so it’s a better developmental experience. There are three suggestions included:

  1. Feel the pain
  2. Treat it like an exam
  3. Join a forex trading contest

I have no idea how the exam thing is supposed to work since successful trading is a continuous process, not a discreet experience. Grading yourself in the different aspects of your trading (risk management, sticking to your plan, etc.) is certainly something you should be doing periodically, but the exam metaphor doesn’t work for me in this case.

As for the first and third alternative, they both have the same issue. How do you feel the pain when you have nothing at risk. As I noted following my academic conference trip a couple weeks back, you need the experience to be salient. Demo trading is good for learning mechanics and testing things, but cannot properly provide the same emotional/intellectual experience as live trading. That’s why I’ve so often said you need to trade real money, not paper money and totally agree with the Abnormal Returns sentiment on the subject.

As for trading contests, I’ve never been a big fan. They focus on the wrong things. On a related note, CNBC was forced to temporarily shut down its annual competition because of manipulation (see this and this).

Trading Tips

Trade real money, not paper money

In the last chapter of The Essentials of Trading I wrote something that many people would consider flying in the face of most commonly held trading views. I said, in no uncertain terms, that you should start trading with real money as quickly as possible. The point I was making then, and continue to make when I talk to developing traders, is that you will never get a proper understanding of what trading really means until you have money at risk.

Now of course I’m not suggesting in any way that someone new to the markets dumps their life savings in to a trading account and starts buying in selling. That would be the height of folly. Risk management must always be the first consideration.

What do I mean, though, is that you can quite easily these days take a little bit of money and do some trading. I know there is at least one forex broker who will allow you to open a trading account with no minimum initial deposit and no minimum trade size. That means you can get in to real world trading without putting a large amount of capital at risk.

Why do I think this is so important?

Quite simply, paper trading is never going to give you the proper feel for what you will go through when your money is actually on the line. It doesn’t even really have to be a large amount at risk to make a meaningful change in your view of the markets. Trading with real money impacts your psychology. It’s important that you understand exactly what that impact will be as quickly as possible. That knowledge can really help you develop as a trader.

Psychology aside, getting as much trading experience as possible is something all traders should be doing. As a recent Kirk Report posts says “books, websites, seminars, etc. on trading will never replace battle-hardened experience”. Throw paper trading in to that mix. Just as in any other area of life, the more you do something, the better you will get at it.

So put a little bit of money in a real account and get trading!