Trading Tips

Millionaire Trader Advice

There’s a new book out which is garnering some attention. It’s title is Millionaire Traders and is essentially a collection of interviews with a group of presumably highly successful traders. I have not, as yet, had the opportunity to read it, but I have seen a collection of lessons the authors pulled from their interviews. Most of them are good. I do have a bone to pick with one or two. Here’s one of them:

Triple Your Demo Twice Before Trading for Real”

As anyone who has read my book, The Essentials of Trading, or gone through my trading course will tell you, I am definitely all for new traders spending time using demo platforms to get a good feel for trading and the markets, and to test out trading strategies. At the same time, though, I’m also a major proponent of getting one’s feet wet in markets, with real money (a very, very small amount, of course) as quickly as possible.

That may sound crazy, but hear my out. My reason for that is impact having actual money – even just a little bit – at risk in the market has on a trader’s psyche. The transformation can really be amazing. One can be the most calm, collected, and confident demo account trader, but as soon as even $10 is exposed they become obsessed with every single price movement, second guessing their analysis or system, and basically being anything but the person who did so well paper trading.

The advice about twice tripling in your demo account comes from an accomplished forex trader, and it’s well intentioned. His driving point is that you want to practice to the level of at least firm competence before venturing forth to do it for real. There are two very significant arguments against this particular recommendation, though.

Firstly, to make a hard statement about the type of returns you achieve in your demo account completely flies in the face of the fact that traders have different objectives for their trading. We are all different. Some folks can be aggressive and go after triple digit returns in relatively short periods of time.

Other folks, though, are more conservative and would not be expected to play the markets in that kind of fashion. For people in the latter group, the process of trying to triple their account could very well produce in them a dangerous perspective on risk. It’s very easy to not give that side of the equation is proper attention in demo trading. After all, it’s not real money, is it? That makes chasing the big returns suggested by the above recommendation a potentially destructive pursuit in terms of one’s development as a trader.

My second bone to pick with on the general trader education development topic. I have quite a bit of coaching and teaching experience, and therefore a pretty good handle on skill acquisition. Point blank, it takes using the skill in realistic situations to really develop.

In sports there is definitely basic skill training, but no coach would ever (willingly) take a player straight from skill practice and put them in a critical competition situation, which is essentially what the above advice suggest doing. Rather, the coach will first put that player into increasingly more game like drills. Then the player will execute the skill in scrimmages. Then it will be small spells during actual games with little pressure, and so on.

By all means, if you are a new trader, use demo trading to learn the mechanics of it all and get a feel for the markets. As soon as you’re comfortable with that, though, give yourself the valuable experience low level exposure to real trading provides. Otherwise, you’ll be like the soccer player who has practiced shooting on goal for hours and hours and is then thrust in to take the deciding penalty in the championship match as your first real game experience.

By John

Author of The Essentials of Trading

1 reply on “Millionaire Trader Advice”

I’ll simply say that I fully agree with you on the psychological side — trading my first small live account was revelatory. As much as I thought I’d be able to handle the psychology of a live account before actually trying it, the fact of the matter was (I quickly found out) that I was utterly unprepared for it. It’s taken me the best part of a year now to hopefully learn the needed lessons and develop the neccesary detachment from the markets neccesary (though not by itself sufficient) for successful trading. So, yes, for many traders I’d recommend to also trade with a small live account early on, but then, try to also learn the discipline of continuing to trade and experiment with your demo account. Ultimately you want to learn (experience) all the hard lessons and make the noob trader mistakes (e.g. revenge trading, “hail mary” trades, over leveraged trades, feeling what it feels like to not cut your losses when you should etc. etc.) ideally on your demo account or worst case on you small live account so that once you graduate to a “proper” account you won’t one day be faced with a much bigger disaster.

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