You just hit another nice winner on your demo account ….it’s been about 3 months now and you feel confident that your ready to make the jump to trading a real live account. You feel ready to try your hand at live trading, yet questions and doubts still linger in your mind….
From all the emails I answer every week, I know for a fact that most traders begin trading live well before they are ready, and there’s a good chance you are guilty of this too (I know I was back when I started). But how can you know “for sure” if you’re ready to start risking real money in the markets or not? Well, unfortunately there is no 100% sure-fire way to know if you are ready to trade live or not, but there are some things that you can do to be prepared for live-account trading and there are definitely some things you NEED to know before trading live…
We tell ourselves all kinds of things that convince us it’s OK to start risking our money in the markets; it’s pretty easy to justify something to yourself if you really want it bad enough.
There’s a fine line between logic and emotion that causes many traders to trade live before they are truly ready. Today’s lesson is going to discuss 5 logic-based things you REALLY need to know before you start risking your hard-earned money in the markets, I hope what you read below will save you money, time and stress:
Be aware of your biology
Humans are wired to be less risk averse after winning and more risk averse after losing; in other words, we are basically wired by evolution to be bad at trading. In reality, how risky you feel the market is should not change very much from one trade to the next. For example, after wining 5 trades in a row most people will feel quite a bit more “numb” to the fact that the next trade could be a loser. Conversely, if you lose 5 trades in a row your perception of risk on the next trade is typically going to be a lot higher than it should be, so much so that you might risk a lot less than normal or possibly even be too afraid to enter a perfectly good setup.
What you have to realize is that for any given trading strategy or system there’s a random distribution of winners and losers. If you have found over time that you can win 55% of the time with your trading strategy, that means you’re going to lose 45% of the time…and you never know which trade is going to be a winner and which will be a loser…because they are randomly distributed. So, whilst you might have an entry method in the market that gives you the ability to profit over a series of trades, you cannot fall into the trap of thinking that you “know for sure” what is going to happen on your next trade. It’s this mentality that causes traders to become too confident after a few winners and risk more than they normally would and then….bam!; they hit a loser whilst their risk is ratcheted up to 2 or 3 times its normal amount. It doesn’t take too much to see how this can affect your trading…you hit a loser while risking too much because you were over-confident, then you get angry that you lost more than you normally do so you try to “make it back” and you dive right back in even though your entry strategy is not present… until you’ve blown your trading account.
What’s the fix?
The fix for our evolution-generated trading “handicaps”, is to first just accept that we were born pre-wired to be less concerned with risk after winning and over-concerned with risk after losing. If you don’t believe me about this “wiring” problem then check out this video and article by John Coates who is a former Wall Street trader, Deutsche bank trader and an author: Is Biology to Blame?
Once you’ve accepted your biological trading faults, you can start to work on overcoming them simply by being realistic, logical and disciplined. But, it’s CRITICAL that you are aware of your biological trading issues before you start trading live, because it’s very hard to detect them whilst trading live and especially if no one has informed you of them. It really just comes down to you being consciously aware of what you are doing in the markets all the time, always ask yourself if what you are about to do is an emotion-based decision or a logic-based decision.
Make sure you want to be a trader because you really love trading
On the surface, trading seems deceptively easy, but it really takes someone with a strong passion and interest to excel at it. You’ve got to be able to become immune to losing and be able to be disciplined and patient…many people simply cannot do these things very easily. Before you start risking your hard-earned money in the markets, you have to sit down and honestly ask yourself how well you think you will operate in a world of constant temptation? Are you someone who can look temptation in the eye and ignore it? If not, you might have trouble with over-trading and risking too much per trade.
Do you have patience enough to wait for your trading strategy to show itself before you trade? Are you disciplined? These things are not impossible for you to attain, but some people have an easier time with them than others. If you have enough passion and desire to become a successful trader you can work through whatever psychological traits you have working against you. However, if you’re just looking for some “easy money” and you don’t want to fix whatever psychological / mental problems you have that are interfering with your trading, you should probably forget about trading and move on to something else.
All brokers (and charting platforms) are not created equal
Unfortunately, all brokers are not created equal in the Forex world. Many brokers do not offer the most pertinent charts for you to make your trading decisions from. For many beginning traders, the fact that they might be looking at charts that aren’t as accurate or relevant as they could be does not even occur to them. Again, this is something that you NEED to know before trading live but that you won’t read on most other trading websites. So, that’s why I’m telling you…you NEED a broker who offers New York close charts that have 5 daily bars per week instead of 6, here’s why:
The New York close coincides with the end of the current Forex trading day and the start of the new one which occurs at 5pm NY time as New Zealand / Australia and Asia trading gets underway. The New York close charts also reflect the close of the 2nd heaviest Forex trading session which is the New York session.
Closing prices are the most important in any market, as they reflect who won the battle between the bulls and bears that day, and because daily chart trading strategies are so critical for all beginning traders to learn, we need to see the most accurate and relevant daily chart closing price. Also, it’s important to have 5-daily bars, not 6, as the Sunday bar should be included with the Monday bar since there is no actual “Sunday” trading at any of the world’s major financial centers.
Learn To Use The Trading Platform First
Another important part about trading platforms is that BEFORE you trade live you NEED to demo trade the platform you will use to trade live with. You need to get familiar with how the platform functions, how to execute trades and how to set up the charts for your analysis etc…you don’t want to lose money simply because you didn’t take the time to learn how your trading platform works. For those of you who need help with setting up your MT4 platform correctly, you can read the detailed tutorial I wrote recently: How to set up your MT4 charts.
Successful trading is not about being “right” or having high winning percentages
Many beginning traders think that they have to try and win every trade to be profitable. However, this really could not be farther from the truth. For some traders it becomes an ego thing in regards to losing trades; they think they are “smarter” or “better” than most other traders or that they have some special ability to analyze the markets that no one else has. This causes them to get too concerned with winning percentages and they try to have as few losing trades as possible.
The key to success in the market is not about having a small amount of losing trades, it’s about minimizing the losing trades you do have; keeping them contained. Trading success depends more on capital preservation and risk management skills than anything else: if you can manage to maintain all your losers at 1R (see previous “risk management” link if you don’t know what “1R” means) or less and only trade when your entry technique is really present, you will be putting yourself ahead of many traders. All you need to do then is combine your risk management ability with a high-probability trading strategy like my price action strategies, and trade it with discipline, and you’ll have a recipe for success.
Once you begin to focus on controlling your risk and on maintaining your losses instead of avoiding them, you will truly be on the road to trading success. This is called being a “risk manager” and this is a much more useful way to think of yourself instead of a “trader” or “speculator”. The underlying point here is that you don’t need to be “right” or have a high winning percentage to make money as a trader, to see the math behind this checkout last week’s article on how to remove fear from your trading.
If you can’t easily explain your trading strategy to a ten year old, it’s too complicated
Before you start trading live you need to make sure that you know what you’re doing. Before I sign off today, I’m going to leave you guys with some “must haves” before trading live. If you do not have the following things then I STRONGLY suggest you stay on demo until you do:
1) A trading strategy that’s not too complicated and that you can easily explain to a 10 year old kid. Price action trading obviously fits the bill here, I’ve been trading with price action strategies for years and it really is the most stress-free way to trade. If someone asks me about my trading strategy I can easily explain it to them by just explaining simple price dynamics in the market; I don’t need to talk about indicators, trading software, complicated math, Elliot waves or anything else that’s too complicated for its own good.
2) A trading plan you’ve built from the trading strategy you’ve mastered. I know it’s cliché and I know you might be thinking you don’t really need a written out or typed out trading plan, but you do. Even if your trading plan is to do a weekly or daily market commentary like I do, that is a lot better than many traders who have no plan whatsoever. You need to consolidate your thoughts and overall trading strategy into a daily guide of sorts, that way you are prepared and this helps you to trade off logic rather than emotion.
3) A trading journal to track your progress. A simple spread sheet journal is fine; it doesn’t have to be complicated. You just need a journal to track your progress over time, if you need a template for one then see this link on trading journals. A journal will help to show you how discipline and patience pay off over time and this will reinforce positive trading habits. It’s also a must to have an accurate track record if you want anyone to give you funds to trade with down the road.
4) Take points 1 to 3 and demo trade with them until you’re confident and seeing consistent profits on your demo account. Some people will only need a month of demo trading, some might need 6 months; every trader is different. The point is that you are taking your trading strategy and practicing it on a demo account before you go live. It always amazes me how so many traders just ignore demo trading and begin trading live as soon as they feel like they know a thing or two about the markets. Don’t be fooled, if you aren’t prepared you WILL lose money, and losing money is equal to losing time, and time is precious as we all know, so do what you can to avoid losing it unnecessarily. You will have losing trades no matter what, but the goal of trading is to minimize them; not to avoid them. You minimize them by being prepared.
Maybe you realized after reading today’s lesson that you shouldn’t be trading live, in which case, stop now and go back to demo. Maybe you haven’t yet traded live and you are still getting prepared, in that case I trust this article helped you a lot too. Whatever the case, leave your comments below, I want to hear your thoughts.
If you enjoyed this lesson and want to learn more about developing the strategies and skills required to trade live with confidence, checkout my Forex trading course here. If you have any questions, feel free to contact me here.