What's Wrong With Demo Trading?
As you begin to learn to trade, should you use a demo account? Absolutely!
As you move into mastery of Forex, should you keep a demo account running on the side? Absolutely!
What about the middle years, as you are gathering up your 10,000 hours and going up and down the learning curve – should you be taking your trades on a demo account? Absolutely NOT!
Here's what we found: When we were running demo accounts, we always had in the back of our mind "Well, it's only a demo account. If we blow it up, or even take a bigger drawdown than we like looking at, we can just start again." So we'd always have a bit of an experimental attitude about the trades we took. We would take trades that only met 70% of our entry criteria, we'd use a bigger stop or be a bit cavalier about entering before news. In other words, we were sloppy. In fact, if we're being truthful, we still are when we demo trade. (We've even signed up with 'mentors' who ran their chat rooms on what turned out to be demo accounts, and had this same attitude about which trades they took – yikes! Watch out for that: big red flag).
Does this kind of demo trading help you? A little bit – but in the middle years, as you move between rookie and Pro, this kind of demo trading can actually be much more harmful than beneficial. You'd be much better served by only trading on a live account in the middle phase of your development – as large an account as you can afford to lose, so you honestly feel the consequences of your decisions.
Yet practice in this phase is critical - so how do you go about getting in your practice time? That's the theme of this lesson.
Good trading to you all, Evelyn & Mindy
Part A: Deliberate Practice
This quote comes from the book Outliers, The Story of Success by Malcolm Gladwell, who references professor K. Anders Ericsson of Florida State University -
The best people in any field are those who devote the most hours to what the researchers call "deliberate practice". It's activity that's explicitly intended to improve performance, that reaches for objectives just beyond one's level of competence, provides feedback on results and involves high levels of repetition.
For example: Simply hitting a bucket of balls is not deliberate practice, which is why most golfers don't get better. Hitting an eight-iron 300 times with a goal of leaving the ball within 20 feet of the pin 80 percent of the time, continually observing results and making appropriate adjustments, and doing that for hours every day - that's deliberate practice.
Consistency is crucial. As Ericsson notes, “Elite performers in many diverse domains have been found to practice, on the average, roughly the same amount every day, including weekends.”
Evidence crosses a remarkable range of fields. In a study of 20-year-old violinists by Ericsson and colleagues, the best group (as judged by conservatory teachers) averaged 10,000 hours of deliberate practice over their lives; the next-best averaged 7,500 hours; and the next, 5,000. It's the same story in surgery, insurance sales, and virtually every sport. More deliberate practice equals better performance. Tons of it equals great performance. [cnn/Fortune Magazine]
Part B: How Should Traders Practice?
There are two ways to practice: the fast way and the slow way. If you're in no hurry to amass your fortune, stop reading here. If you're serious about becoming a great trader, then think about this:
If you are a golfer and want to get good, you could go out and play on a golf course every day. You'd have real life experiences on varying terrain and you'd have the genuine challenge of pitting your skills against other golfers. Over 18 holes of golf, you'd hit about 75-110 shots and it would take you 4-6 hours to get this practice in.
But no golfer does just that, do they?! They also go to a practice range, and they spend a solid hour or more just hitting a bucket or two of balls. In that hour they might hit 50-100 balls. So the focused practice gives them about four times the experience of just walking a course and playing a real 18-hole game. If they want to get good, they're out there on the practice range every day. And they also play the course too.
Now think about Forex. Let's say you trade a 15 minute candle chart. You come to your trading station and sit and watch the candles form. In an hour, how many candles do you see? That's right: four. How many opportunities do you have in that time to decide whether your entry setup has occurred, put in an order, and watch the consequences of your decision? Maybe once. If that. There may not be a good entry setup in this particular one hour we're talking about. So you sit and wait for the next hour. This is trading. This is just like walking the course and playing the game on 18 holes – there's a lot of in-between time spent in your golf cart or walking from tee to green, or waiting for the rest of your foursome to hit.
If you were to use the Forex Tester, which is exclusively designed as a simulation program, how many 15 minute candles might you see forming in that same one hour? Well depending on the simplicity or complexity of your trade analysis, you could go through 100 - 1000 candles. How many times would you have the opportunity to put in trades and measure the success or failure of your decision-making process? Maybe dozens of times. It's CONCENTRATED practice and it is absolutely critical to develop mastery.
But there's one more component to this: As Ericsson says above, there's 'practice' and there's 'deliberate practice'. Just as it's not about hitting bucket after bucket of golf balls without trying to hit targets or set goals, in trading, it's also not about putting in trade after trade after trade, without stepping back and using a system of analysis to see if your strategy and approach is a good one or not. This is what the Trade Log can give you – a way to step back and see what works well and what needs to be improved upon. And the Trade Log can directly import your Forex Tester statements, making detailed analysis much easier.
We've prepared a YouTube video for this where we talk about it in more detail: watch the movie now.