Every trader is well aware of the seemingly dismal success rate amongst forex traders, as much of the research suggests less than 10%. Fundamentally, most traders who lose in the long run fail at money management.
While this reason makes logical sense since forex is really a numbers game, several other factors contribute to this reality. In any sport, newer players go through many years on training grounds practicing for real matches where the stakes are higher.
Similarly, newbies in forex utilize demo accounts to prepare themselves for the real markets thoroughly. Although some might argue such accounts aren’t as valuable as they seem, many traders tend to skimp on this process in a rush to go live.
One of the problems with trading forex is it is more of an art than science. There is no universal law stating the sufficient amount of time someone should spend in a demo account or how much they need to know.
This often ensues in many traders moving back and forth between demo and live, resulting in lost money and time. Knowing when a newbie is ready to go live is one of the most important decisions to make, and there are some key telltale signs to observe.
1. You have a well-defined trading plan
As the legendary Benjamin Franklin once said, if you fail to plan, you plan to fail. Trading is purely a planning game. Traders develop strategies and make plans around them. Many variables are involved in creating both of these that cannot be skimped upon before going live.
A well-defined trading plan should involve the following in as much detail as possible:
- The trading strategy, i.e., patterns, tools, confirmation factors, indicators, trading style.
- Risk and reward parameters: the average return per trade and the overall money management
- Watchlist: the exact number of pairs someone will trade in the real markets
- Routine: the frequency and times of scanning and trading the markets
One often overlooked aspect of trading strategies is data. Too many traders don’t thoroughly back and forward-test their strategies, leading to a lack of confidence and the prevalence of analysis paralysis.
Fortunately, journaling and simulation software is available to provide crucial statistics about a strategy and how it is likely to perform in the future. Arguably, the strategy is the most important part of the trading plan, and everything else works around it.
Another aspect is how a trader fully understands the psychological game of trading by avoiding some of the detrimental emotions of greed, fear, hope, and regret.
2. You have been profitable for at least one year
This point is arguably the most important because while new traders can formulate a myriad of strategies, it’s no use if they cannot prove a level of profitability over the long haul. While one can backtest rigorously, profits should be measured in real-time or essentially in the forward testing stage.
The challenge here is keeping a consistent record reflecting all the positions that would have been taken without error. Thus, it might take longer to formulate this data as the trader needs to properly account for wins and losses without favoring one over the other.
The percentage increase or the amount of profit doesn’t matter; only that the account is in profit after at least a year or longer.
3. You have spent at least a year demo trading
This point links to the previous one. Unfortunately, there is no hard and fast rule about how long someone should stay in the demo stage. The time frames frequently referenced in this regard range from one month, three months, to six months.
Debates continue regarding this topic because there is no consensus. Needless to say, people’s learning curves will vary significantly, meaning some can become very skilled in a shorter span compared to others. However, at least one full year is technically more reliable for a few reasons.
As briefly mentioned, traders should spend time collecting the necessary data about their strategy during the demo phase, which is naturally a tedious process. Moreover, it’s not uncommon for many to use numerous demo accounts during their journey.
Each time they have a new account, their starting point to track progress is also reset. Another reason why a year is fairly sufficient also has to do with market conditions. An experienced trader needs to witness how markets will move from trending to ranging as it so frequently occurs.
This is something that can only be experienced through time. It all boils down to familiarity as markets never remain the same, and someone’s strategy needs to account for the difference. Overall, time offers many benefits above skill and quickness of learning.
Spending this long a demo account also means one will be very familiar with navigating their chosen platform from charting to execution functionalities.
4. You have disposable income
Even if a trader has gained a sufficient level of confidence in trading or analyzing the markets, they still need to have disposable risk capital for their live accounts. This money should be separate from any living expenses, taxes, and savings.
One common mistake with new traders is using funds they would ordinarily need for their daily living. When the capital being used has an emotional attachment, one is likely to commit some detrimental mistakes leading to losing all or a substantial part of their account.
Final word
Arguments about demo accounts lacking the psychological elements of trading do hold merit. It is one of the reasons most new traders can perform fairly well in the demo stage and fail terribly in the live markets.
Some have advocated much of the required experience should come from losses in a live account. Although most successful traders never had a smooth journey, new traders can save themselves a lot of money by staying on a demo account for as long as possible.
A demo account is critical to iron out many of the technical mistakes traders make in the real world. Psychology is not necessarily the only reason many people struggle.
Of course, a trader can show all the signs of being ready for a live account. However, suppose traders pass some milestones during the demo stage. In that case, they are far less likely to lose a lot of money, change strategies, and avoid many of the pitfalls inexperienced investors commit when making the switch.
