When new traders see positive simulated trading and then negative live trading, it can make you question the validity of sim trading.
If you dig a little deeper and look at cause and effect, you begin to see that while virtual trading has issues, it’s not your problem.
The true problem is a reality that many traders have difficulty facing because it makes them totally accountable for the results they get.
Win or lose. Succeed or fail.
The problem is you and how you approach the simulated portion of your trading career.
Simulated Trading Is A Perfect WorldThe act of trading is trading regardless of what you do and the three biggest thing in sim trading that you may experience that can lead you astray are:
Perfect fills
Temptation to curve fit.
Lack of the same emotional roller coaster ride you get with real capital.
Never underestimate the power slippage (and fees) can have on the trading results you get through testing and trading online with a simulated trading account.
Slippage (skid for commodity traders) can actually turn a winning system on paper, into a losing system once all the statistics are accounted for.
While logging your trades, you could account for slippage and account fees in your results which will give you a better estimate of the validity of your trading system.
If we assume we are not going to have to deal with slippage in simulated trading mode, what else won’t we be dealing with?
Pressure That Trading Real Money Can Put On You.
Most people look at paper money the same way they do Monopoly money. There is no attachment to it and just as easily as you collect $200 by passing go, you can collect new virtual funds easily as well.
It takes a mind shift to look at paper money as real money but that is exactly what you have to do.
Before talking about emotions, let’s look at one temptation that can cause your forward testing results to be miles apart from historical.
Curve Fitting Your Trading SystemThe benefit of hind-sight can cause you to tweak your trading rules to give yourself a superb historical trading record. Most times, traders will tweak a trading indicator setting that sets up the perfect trade.
This can be extremely tempting and at the same time lead to disastrous results over time.
One way to combat this temptation is to understand the main types of trades that we can take as traders:
* Trend continuation trades
* Trend termination trades
* Support/resistance holding/failing trades
Develop a trading system that takes into account these categories of trades as well as including a momentum variable.
The issue with system development is that people put far too many variables in play and start to optimize so everything lines up.
Complex Does Not Equate To Trading Results.
You need simple rules and minimal variables to have a more robust trading system and to allow you to consistently apply your rules with limited room to optimize everything.
A basic understanding of “naked chart trading” can help you to see the mechanics of the market, and will allow you to sensibly apply a few well thought variables to take advantage of the main types of trades.
Step Up And PerformWith real money, now you have to perform.
Now a loss will take away from your trading account and depending on your account management, it could clean out your account.
Each loss decreases your position size. Soon, your 3 contracts are 1 contract or worse, you don’t have the required margin to trade any longer.
Real money introduces stress for most people.
Fear of loss is a real fear, a stress, and that can cause a person to take actions not related positive trading protocols.
Watch your real money trade go against you and tune into your body. How do you feel?
Most people get anxious and can almost hear their heart beating.
Blood is pumping through your body even faster as the stress mounts.
You feel real anger as the market “is out to get you”
You watch price tick your stop and your account balance is now down, in a perfect world, the exact amount you risked on the trade.
You Don’t Automatically Reset Internally But Decide To Make Back The Loss.
The same trading rules you stuck to in sim trading now become more of a guideline that you can blur. Marginal trades happen.
I remember when I started that I didn’t actually think I was breaking my rules. It was not until I started to go over the trades for the day/week that I realized that I have taken liberties with the rules.
Either do something right or don’t do it at all.
If you are not prepared to twist your mind around a sim account as real money, don’t bother trading sim.
I know some traders that when they are feeling loose with their rules, sim trade instead of using their real account.
What a horrible idea.
There is the saying “practice makes perfect” but that is not complete.
“Perfect Practice Makes Perfect” Is The Better Mantra.
If you allow yourself to freely break your rules, that habit becomes ingrained and your path to successful trading is going to be a much longer one. The path may even never have an ending as you continually break protocols and trading success eludes you.
If I swing a bat without looking at the ball, most times I am going to miss.
If I continue to practice that way, ignoring technique, what are the chances I will ever hit a home run?
Slim? None?
Simulated Trading ConsequencesIn my experience, it is about the stress of real money. It is the inability to attach importance to the paper money.
This has to change.
So what can you do?One thing that may help that attachment is to donate a percentage of your paper trading losses. Not a lot but enough that causes you to wince.
Let’s say you took a $100 sim trade loss on a trade where you broke your trading rules. That money is not real and that loss has no immediate consequence.
What if you were to take a real loss by donating a small percentage of the virtual loss?
Take a small percentage of the paper loss from your simulated trading account that was a result of not following your trading plan and donate it. Not only will it do you some good as there was a real consequence to your action but you will be helping someone out along the way.
What else can this do?It can ensure that you are trading a percentage of the sim account that you could afford if trading live. There is no sense trading a $25000 sim account at 2% risk per trade ($500) if you can only fund your account with $5000.
Ensure that the virtual trading account you are using is the amount you will fund your trading account with.
