Not sure when you should move from demo to trading live in forex? This article will cover the three solid signs you want to consider.
We can liken a demo account in forex to attending the university to attain a trader qualification. The live account is the real world you join after those days of studying. As in life, it’s a common theme that not all tertiary institutions thoroughly prepare graduates after they finish studying.
In a similar vein, we can relate this concept to trading forex as well. It’s quite a tendency for traders not to be fully prepared for the live account stage despite showing some promise in the demo stage.
Ultimately, transitioning from demo to live takes some serious preparation that we should not underestimate whatsoever. The question is, which signs should you look out for to know you’re ready?
Of course, the answer consists of different parts, and it’s more than just whether you have made profits. This article will cover the three solid signs to observe in this regard.
You have a well-quantified trading strategy and plan
This sign is perhaps the most important. One of the purposes of demo trading is collecting data, an aspect many traders miss. You discover various strategies in this stage until you find one suitable to your preferences, experience, and skill level.
One of the reasons traders fail immediately after going live is not having a quantifiable trading strategy. In other words, you need to know everything about what you do in the markets, from planning to execution. Here are some key considerations:
- What time frames, pairs, and indicators/tools are you using primarily?
- Have you defined your inherent trading style, i.e., scalping, day trading, swing trading, etc.?
- Have you written down your entry criteria for every position?
- How many setups do you trade, 1, 2, 3? Does each one have a clear checklist for identifying entry signals?
The questions above are some of the things to thoroughly consider in the demo stage, which need no hesitation in the live phase. Another aspect of quantification is gaining the necessary performance metrics based on a particular strategy.
Traders can gather this data through software, which is worth its weight in gold. Here are the datasets new traders should analyze before going live:
- Average risk-to-reward
- Average win percentage
- Max drawdown
- Profit factor
Once a trader has gathered this information, and it reflects a profitable result, it’s one of the strongest signs they are ready to start trading live.
You have traded and have been profitable for at least a year
It’s challenging to put a time frame for how long a new trader should stay with their demo account before going live. Yet, there are a few reasons why one year is sufficient. As already mentioned, you need to gather as much data as possible, which is naturally a time-consuming endeavor.
You need to collect a large sample size of trades with well-defined entry and exit levels, at least 100 of these. Of course, the more, the better so that you can gain a more accurate assessment. This is the point of proper back-testing and forward-testing.
Trading is purely about probabilities, and these are difficult to judge over a few positions. However, they are better to assess over the long run, which is one of the motivations for staying at least a year on a demo account.
Another consideration point is exploring different market conditions, which will test someone’s emotional skills. A trader will want to experience all the various cycles of the forex markets and see how their strategies perform during these periods. Again, you can only observe this over an extended time.
Hopefully, afterward, your results will reflect a sufficient profit.
You plan to start trading with disposable income
So, you’ve exhibited signs of having a highly defined trading plan/strategy and have proven profitability at least over a year; what’s next? Another crucial piece of the puzzle is starting with disposable income.
By disposable, it means money not related to your living expenses, savings, and taxes. The main reason for using these funds is not having any attachment to the money on the line. No matter a trader’s confidence, there is always a chance of loss in the markets.
It’s typical for newer traders to commit erroneous mistakes primarily because of their attachment to their real trading account.
What if a trader feels ready to move from demo to live a lot sooner?
Debates will continue over the length of time a new trader should spend on a demo account. We believe a year is a reasonable period to trade a strategy to consider its strong and weak points, gather sufficient data, and trade through different market conditions.
Most new traders overlook these elements. Without understanding these aspects, you are likely to lose confidence in your trading strategy when things don’t go well. Still, someone may feel more ready to dive into the live stage a lot sooner if they possess a high level of confidence.
So, what’s the solution? A new trader may consider opening a cent or nano account instead of the typical standard one. This account will allow opening positions starting from 0.001 (nano lots), meaning they can fund as low as $50 or less and trade most pairs with sufficient margin.
Some traders even perform their forward-testing using such an account. The point is testing the waters bit by bit through little financial exposure. Even if a trader is confident enough to go live, it is more conservative to start small and grow from there instead of investing a sizable amount on a standard account from the start.
In any forex trader’s journey, transitioning smoothly from demo to live trading is an important step. Unfortunately, the switch is rarely ever smooth since a trader may not have faced the psychological challenges of trading real money.
Nonetheless, you are better prepared once you recognize the tangible signs beforehand, giving you the best chance of success. As briefly mentioned, it’s always best to start small and build from that point rather than going all guns blazing.
A cent account is one consideration in this regard where traders can lose little money should they make any mistakes in the live stage.