How did you get into the trade? If you are like me, you probably began with a demo account so that you could get used to the trading platform, the tools, and options. It’s a great idea to get past the learning curve before putting real money on the line. But there are significant pitfalls to demo trading platforms that can give newbies a false sense of security and disproportional confidence.
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Yes, it’s a great idea to start with a demo account for exactly the reasons we stated above but you have to have the right mindset and commit to making the practice experience as close to the real thing.
Why?
Because you can come out of the gate knowing it’s fake money that you’re playing around with and don’t take the concepts behind the practice very seriously. In essence, it can be a very slippery slope.
Furthermore, if you don’t take the demo aspect seriously, then the transition into the real account with real money is a substantially different world and alternate mindset.
With one, there is no pressure to succeed and build a proper portfolio. With the other, you might be playing with your retirement or life’s savings. Lose money in the demo – meh – it’s not biggie. Lose money in the real thing and rage trading – you might lose your shirt. Of course this is extreme but the point is, take your practice seriously!
Do you think pro athletes are great because they goof off during practice sessions? Hell, no. And herein lies another issue. You have to hold yourself accountable. Chances are you don’t have a coach yelling at you to do the right thing.
In all honesty, the demo accounts and live accounts are very similar, though you might have expanded tools in the live version. The biggest discrepancy is the emotional and psychological aspect, and the stress.
So, let’s work on that and make your demo account look and feel like a real one.
Create Risk Rules
Just like you would do if you had a real account, create some rules around the way you manage money. There is always a temptation to be negligent and careless in your demo account but if you want to take the practice seriously, first decide how aggressively you wish to trade, and how much of your real fake money you want to manage.
Keep it close to your real life budget then figure out your draw-down size.
If, for example, you want to be a day trader in real time, keep a trading journal of how much you can risk (lose) in a day. This is setting you up with real financial boundaries. Likewise, in a demo account, you have to determine what your draw-down limit is going to be. Say, for example, you set your draw-down to be $1,000. That doesn’t mean that on a loss day that you lose $1,000 all the time. The idea of a reduction is that in a worst-case scenario, you don’t lose more than $1,000. It could be $400, or $600, etc.
If you’re looking to be more of a long-term trader and HODLer, then set those draw-down limits to weekly or monthly, then do your best to respect those limits.
Attach a Penalty for Breaking the Rules
A good friend once said that we don’t change direction until we hit critical mass. In the mind of a trader in a demo session, you have to train your brain that breaking the rules hurts.
We know it’s a demo and we know there are no consequences of losing real money but you cannot let that kind of lazy, go-lucky mindset get in the way of training you for the real thing.
You break the rules, you have to find some kind of tangible punishment.
Some ideas could be monetary; throw a dollar in the bucket every time you break a rule.
It could be physical; snap a rubber band on your wrist or make yourself do 30 squats.
It could be comfort; no cookie after dinner for breaking the rules. Hey, whatever works. You are the master of your inner child and should know what motivates you.
The idea is to have something real-time that you pay with each time you make the wrong choice. If you want to grow bigger, put a weight on your muscles. It is just about the same thing with a demo account. If you will get discipline and tact using a demo account, put yourself under real pressure.
Reward Yourself for Good Behavior
With penalties for bad behavior should also be reward for good behavior. When you’ve begun to master the demo tools of the trading platform and you find that your demo account is doing well with the true-to-life structure and mindset, then by all means, reward yourself! Eat the cookie, take the money from the naughty jar and treat yourself to dinner.
Always remember WHY you wish to begin your trading career and the end goal. By the way, if you don’t have a goal for your trading, then do it. Trading with no sense of purpose or direction is just playing around.
Restrict Your Position Size
Usually with a demo account, you have a much bigger bankroll than you might have in real life. Just because it’s there doesn’t mean you should play with it.
Scale down your practice wallet to your real one. It will give you an idea of proportion, risk, gains, fees, and all the unexpected cost of things that you don’t realize are coming – unless you take your demo account seriously.
Granted, it’s fun to pretend you’re a trading whale who can move markets with a single trade. If that’s your treat for being a good trader, then by all means, go for it. Just remember to get your head out of the clouds and keep your feet on Earth and your head back in reality when you’re done playing in Fantasy Land.
Let’s quickly highlight the lesson.
- Demos are great if you take it seriously and use the tools to practice like a pro athlete would on the field.
- Set real life trading goals and use your demo account to practice.
- Set rules and boundaries to your trading that mirror what you can do with a live account.
- Penalize yourself for cheating.
- Reward yourself for trading within your boundaries.
- Restrict the position size in your demo account to be realistic.
Do these things and your demo trading experience will enhance your live trading experience. Happy Trading!
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