Many of us tried our hand at forex demo-trading accounts when we started our forex trading journey. Those demo accounts made us feel like superstars raking in all the pips, and we wondered why others are not trading forex so they can become overnight millionaires. You’ll recall the stories tagged with “beginner’s luck” about how newbies are going from $10,000 to $200,000 – on demo accounts. The problem, though, is that the story changes markedly when you start trading on a live account – and your own money is at stake.
Stories about how superstars on demo accounts have become losers with super-sized debts are all over the place. You might even be able to relate to the experience personally when you see that your forex trades were much more profitable on demo accounts than on real live accounts. All in the twinkle of an eye, the forex trader that was beating the market, now has enormous debts on his live trading account.
It is not as if those demo accounts are rigged to suck you into the world of forex trading, only to part you from your hard-earned money when you opt for a live trading account. For instance, you should also read reviews of different brokers before you decide on where to open an account. Finpari review provides an unbiased third-party review of one of the brokers in the market. The fundamental fact that makes all the difference between your performance in demo accounts versus your performance in live trading accounts is the treachery of human emotions. Human beings are wired to behave differently when play money or real money is at stake.
Read on to uncover five questions to ask yourself before you start trading with real money.
- Have You Been Trading Forex Profitably and Consistently for six months?
Most of the available forex training guides will tell you that you should not put your money into a live trading account unless you have been trading forex profitably for three months. The advice is meant to keep you in an “insulated” and risk-free trading environment so that you can experience the up times and the down times. However, many people don’t wait until they have had three months of profitable trades before they bring their life savings to the market – and the rest is a sad tale.
Insights from professional, full-time, successful forex traders show that you’ll need at least six months of trading forex profitably and consistently, before you consider yourself skilled enough to start trading with real money. Six months of profitable trades provides you with a better chance to experience the bull and bear swings across currencies without a significant drop in your profits.
Macroeconomic events rarely influence forex markets for three months at a stretch, but the lingering effects of such events (mainly geopolitical tensions) might extend beyond three months. However, six months would have given you enough time to learn how to adjust your strategies when the market changes so that your profits do not soar and crash with the market. Six months of profitable stock trading would also have taught you how to stay afloat in up markets and down markets. If you haven’t had a consistent winning streak of six months on a demo account, you are probably not ready to trade with your own money.
- Do you have more winning trades than losing trades?
Everybody loses money at one point or another trading forex; even the best forex traders still lose money on ill-timed trades. Any guru/expert/ wizard that claims to have a fail-proof system for trading Forex is either a scam or someone that trades forex in his mind – either way, you don’t want to take that advice. Everybody can, and most people will lose some money trading forex – the difference between successful forex traders and wailing traders is that successful traders have more winning trades than losing trades. Before you cash out your life-savings and deposit it into a live-trading account, you need to be sure that you have more winning trades than losing trades. Most trading accounts will keep a history of all your trades, and you should be able to know how well you are faring based on the volume of the numbers in green in relation to the numbers in red.
A general rule of the thumb that will let you know if you are ready to trade on a live account is that you must have three (3) profitable trades out of every five (5) trades. If you have three winning trades out of every five trades, your two losses would be offset by two wins, and the last win should increase your account balance. However, if your winning trades are not more than your losing trades, you are not ready for the live market.
- Do you have a trading journal and have you been recording trades consistently?
Keeping a trading journal is one of the hardest things to do for a forex trader just starting out. You’ll be eager to get into a potentially winning trade as soon as possible, and you might not even have the time to develop an exit plan. In the reverse, you might want to get out of a losing trade as soon as possible so that you can lick your wounds in private; hence, documenting the trade might be a harrowing experience.
However, you are not likely to go very far in the forex trading journey if you don’t have a trading journal. A trading journal helps you to record ALL your trades (both winning and losing) so that you can learn from your success and failures. A trading journal gives the benefit of hindsight when you are about to enter a new trade, and it also helps you to uncover patterns in your trading activities over a definite period. If you are not disciplined enough to keep a trading journal, you are not ready to trade forex with real money.
- How many trading styles have you mastered?
Forex trading might be as well a full-time job since you’ll probably spend as much as it takes to bag a degree to master forex trading. Before you start trading forex on a live account, you need to be sure that you have tried your hand at different trading styles. Trading stocks, forex, or binary options online come in various styles and flavors; each style matches different human personalities, time available, risk aversion, and account size among other things.
After trying multiple different trading styles, you must master the style you want to adopt. It might interest you to know that you’ll need to stick to a trading style during up markets and down markets. Hence, you might be short-changing yourself if you choose a style before you have tried most of the available trading techniques. Before you leave the demo trading class, you should attempt to do some day trading, scalping, and mechanical trading among other styles.
- Have you identified the trading plan/system/process that works for you?
A wise man once said, “Failing to plan is the same as planning to fail.” To trade forex successfully, you need to plan every detail of the trade. You’ll need a plan on the currency pair to trade, the number of pairs, the amount to trade, how long to stay in the trade, what to do when the trade is making sense, and you must have a good exit strategy among other things. It doesn’t matter whether you call it a plan, strategy, blueprint, system, or process: you can’t go into a trade without it.
You’ll have to pick one of those trading schemes that works for your personality, skill level, and risk-aversion. Some of the strategies you might consider trying are: The Bladerunner Trade, Bolly Band Bounce Trade, Daily Fibonacci Pivot Trade, London Hammer Trade, and the Bladerunner Reversal.
You might also consider creating a unique strategy by merging elements from different strategies. You must remember that you need a plan that you’ll stick to during both the uptimes and the downtimes in the markets.
Rules for Risk Management
If you have answered any of the questions above with a “No,” you might want to spend some more time trading forex on demo accounts before you start trading with real money.
Now that you know the five questions to ask yourself before graduating from a demo trading account to a live trading account, you should learn some of the rules that successful traders follow for risk management
- Plan your trades
The importance of planning your trades when you trade forex cannot be over emphasized. You should plan each trade by making a conscious decision on lot sizes, how much money you are staking, how much profit you want to make, how much of a loss is enough, and how long you’ll stay in the trade, among other things. You can’t enter a forex trade without a plan; forex is not the type of business in which you make important decisions when you get to the bridge.
- Use Stop-Loss and Take-Profit effectively
You should also learn how to use stop-loss points and take-profit points effectively – more importantly, you must be disciplined enough to do either of the two when the need arises. Advanced Forex traders know how to use a mental stop to create a range limit at which they will get out of a losing trade. If you are new to live trading accounts, you might be better off setting a hard stop so that you can control your losses.
- Track Overall Exposure
Monitoring your overall exposure across multiple currency pairs will help you stay afloat and reduce your losses. For instance, you must know the dynamics at work between different currency pairs. If you are long USD/GBP, and you are short EUR/USD, you have exposed yourself twice on the USD in the same direction. If the USD should go downhill, you’ll most likely lose on both trades.
- Use Correct lot sizes
Using correct lot sizes would help you manage your risks to avoid debts. For instance, you can’t open a $200 trading account and then expect a 200:1 leverage because you want to place trades worth $10,000. You need to know the level of risk that you are comfortable taking, but you’ll be on the safer side if you trade with small lots when you are just starting out.
Manage your emotions
Trading forex is an exciting and financially rewarding experience if you follow the path that successful traders have trodden. However, you’ll need to master your emotions if you want to trade profitably. You must master your emotions before you graduate from trading on a demo account to trading on a live account. The two main emotions that you must master are the emotions of Fear and Greed.
You must manage your fears – you might be scared of placing a small bet because you don’t want to lose if the trade turns out to be a huge winner. You might be afraid of placing a big bet if you dwell on the possibility that a trade might turn out to be a huge loser. Other fears include the fears of seeing a reversal in a winning trade or a fear-induced rush for the exits when your trading system has not signaled an exit. Another emotion that might cripple you is the fear of losing out on a potentially winning trade after you hear a tip or news – you might then rush into the trade based on the tip even when your trading system has not signaled an entry.
You must learn to manage your greed – your greed might keep you in a winning trade when your trading system has signaled that it is time for you to exit the trade. Your greed might push you to trade an unfamiliar currency pair because you heard that someone made a killing on that currency pair last week. Your greed might force you to trade with a lot size that is bigger than what you can manage.
Finally, trading forex is not to be done lightly. Don’t jump in with both feet when you graduate from trading on a demo account to a live trading account. If you have $5000 with which you want to trade, it might be smarter to start trading the live account with $500 and see how well you manage it. Above all, capital preservation is most important, if you can’t make a profit at the start of your live trading experience, at the very least; don’t lose all your money.