MISTAKE # 10
STAYING TOO LONG ON DEMO ACCOUNTS (aka PAPER TRADING)
Paper trading is hypothetical trading. If you have never traded anything before, you will probably do some paper trading. The benefit of paper trading is that it will help the new trader become acquainted with the basics of interfacing with the markets. This is often a “demo” account with a broker or clearing firm that provides real-time market data but provides a hypothetical balance.
You are allowed to buy and sell as much as you want, just like in a “live” or “real” account. Your hypothetical gains and losses are accrued against your hypothetical account balance over time. As time goes on, most traders find that they can gain quite a surprising amount of paper-profits in a very short period of time. These traders are now completely convinced that they can easily duplicate those hypothetical results in real time with real money. They open their real trading account and POW! Within about three to four weeks they are down usually more than 50% of their equity. This is not my opinion—this is actual fact. Ask any broker in the industry what happens to “paper-traders” who open a real account. The ratio of “paper-traders” to “winning traders” is about one in ninety.
Why does this happen?
Because there was never any real risk to the trader. Paper-trading is a waste of time because paper-trading will never give you the real skills you need to trade. All paper-trading can do is help you learn how to use the functions of your trading platform. In fact, that is a good thing. But once you learn the functions of your platform and your account is ready to trade, everything you learned paper-trading goes out the window because NOW IT IS DO OR DIE. There are no second chances.
Don’t make mistake #1; don’t think you know what you are doing because you pretended to trade without taking any real risk.
HOW TO MAKE THIS MISTAKE WORSE: Continue paper-trading for more than 30 days and/or go back to paper-trading if you have lost money in your first real account.
SOLUTION: Open the absolute smallest account your broker will al ow and trade for 90 days the absolute smal est size possible. If you are ahead, increase your equity size and your trade size by a factor of 20%. If you are losing, stay with the real thing; it’s the only way to learn.
