The article is for all those passionate dreamers and impatient flash guys, who hope to become successful traders as soon as possible, making as little effort as possible.
A good start in any business, as known, is a half of the job done. Trading is no different! The title is quite common, and you are likely to know the main differences between demo account and cent account; so, I won’t repeat the same truths. Rather, I suggest you base yourself on a more global target and treat these account types only as tools, each of which is necessary on a certain step of mastering your trading skills. You may not yet know, but your true objective in trading is not making much money in a short time. Your true objective is to become a good trader.
And, to become a good trader, you need a certain methodology, some consecutive steps you should follow in a disciplined manner and gain confidence in yourself and your approach finally. For each step, a certain account type is appropriate. I’ll note that this article the “gist’ of my own practical experience, I came across all the described advantages and disadvantages on my own, not just read about them in books and made up a kind of logical reasoning =)<>
1. A little background:
Well, when a trader has more or less understood such notions as “price chart”, “trading system”, “indicator”, “trend/flat”, and has read a couple of books as well, there is an inevitable question, “What’s next?” When I was in this situation, I didn't, in fact, think about a demo account, because I though there is no point in it. There is the price, the chart and my trading system (I’ll describe it a little later), so I need to wait for an entry signal, to enter and to close my position. So, why should I put off gaining my first million? So, I started right away. If I’m not mistaken, I deposited $55 into my real account (I thought the cent account to be totally useless at that time), and on was my trading…
I must admit, before I started, I had tested a few strategies from the Internet, available for free access, and developed my own a “kind of strategy”. My “testing” strategies from the Internet, of course, was not exactly real testing – after the first series of losing trades, I moved on to the next system (because, “It doesn’t seem to work”); but I, at least, identified for myself the first entry/exit rules that suited me personally. After that, I backed up the history for a year ago and worked out the statistics, what RSI parameters make my rules be the most efficient (i.e. each month was featured some profit). Encouraged by the feeling of my own virtual power, I started trading on a real account right away, and even succeeded at first. But one day, a series of losing trades started (which is a norm for any trading system) and I got upset. And what was the reason? I’ll explain below.
2. The most important thing at the initial step
The most important thing at the beginning of trading (when you already know the theory but haven’t yet proceeded to practice) is, surprisingly, the understanding of what a trader is and what trading is. “Oh, guy, give up on common general phrases for the most stupid”, some of the readers may think, anticipating boring things about the importance of psychology and risk management. However, I won’t tell the things, usually described in the articles for beginners. They usually write that, yes, the most important is risk management, following the rules of the trading system, “not to trade much”, or something else of that kind of super tips. And completely, just COMPLETELY and EACH TIME, they forget to mention, WHY a trader fails to observe the rules of risk management.
Even though ALL hedge funds observe them, and they seem to be good at trading. And WHY CAN’T or DOESN'T want a trader to follow it? And why they don’t follow the rules of trading strategies, as it is written EVERYWHERE that they must be followed, and it is also reasonable, isn’t it? If the trading system is good, just follow it, and you’ll gain if not in a week, then in a couple of ones. And, again, WHY do people DISLIKE developing and testing their OWN strategies? It is also clear that, sooner or later, they will HAVE TO develop and test it; even if they are based on someone else’s strategy, they will still HAVE TO do to something by their own, to adjust it to themselves. So, why don’t they do it at the initial stage?
The most important thing at the beginning of trading (when you already know the theory but haven’t yet proceeded to practice) is, surprisingly, the understanding of what a trader is and what trading is.
Well, it isn’t done for a very simple reason – because nobody can do it at the beginning. Why? Because everybody WANTS SOMETHING VERY MUCH. I’m likely to be right to claim that most people go in for the market not because they are interested in studying and understanding it and, after many hours of practice, developing a first-class profitable trading system, feeling to be a professional and an expert in the craft. Am I right? Most people start trading because of money. Or a dream. And they also say in the ads that you can attend a free webinar or download a book like “100500 trading secrets” and IMMEDIATELY!!! You’ve understood everything and here you are, under a palm tree with your laptop, earning another 10,000 dollars. It turns so that a beginner, having such a strong wish, sees no reasons to risk 1% of the deposit in order to earn 2%, rather than to risk 10% and to gain 20%. It is simple logic, isn’t it? Why do I need to wait and gain trifles on all those mini-trades, if I can make 10, 20, 50 time more during the SAME TIME? It is like this with the rules of trading system: a trader sees the price moving against, approaching the stop loss. So why do they need to wait until the stop loss works out, if they MAY EXIT EARLIER? And so, the loss will be less. And again, why do they need to wait for the take profit if the price can reverse any moment and they’ll miss some profit then. Am I right?
What I mean is that, at the beginning, a trader just has NO necessary experience, NO aiming at STEADY RESULTS. They are aiming at “much and soon”. They don’t yet know about “serial nature of trades”, which can cause a strategy, yielding 60% of profitable trades, to result in a series of 5 loss-making ones that will significantly reduce the deposit if one risks 10% of it per trade. They neither understand that successful trading is not PREDICTING the price, or that a good trading strategy is not the one that doesn’t let the price go against you and lets you always win; a good strategy is the one that yields you more winning trades than losing ones, and a trade can still bring a profit even after the price is moving against the trader at first.
At the beginning, a trader just has NO necessary experience, NO aiming at STEADY RESULTS. They are aiming at “much and soon”.
Do I think that this information will help you avoid doing so? Of course, I don’t. I’ve already written somewhere that a beginner mostly acts instinctively, so, at first, EVERYBODY will do these wrong things. However, now, you at least understand that it isn’t your own personal fault and you aren’t a hopelessly bad trader. Such behaviour only results from the lack of experience that you will gradually gain with practice. And so, it may be easier for you to identify your instinctive behaviour and to get over it, so that it won’t hinder you gradual (!) developing.
You are likely not to believe me and want to prove to yourself that you are different and you can trade in the right way from the very beginning. I won’t try to discourage you, but, as the article is educational, let me offer you some tips to pass the initial step most efficiently and with minimum losses.
3. I’m not the smartest
It is one of the most important rules of trading. It’s a kind of “indicator” for traders, which shows their current level of development. It is very easy to identify: the stronger you deny this statement, the more likely you are to act “in the wrong way”. The more you admit the phrase, the more your psychology is developed in terms of trading. An important moment: “I’m not the smartest” doesn’t mean “I’m stupid and understand nothing in trading”. It means “I can’t take into account everything” because the financial markets are very specific. It would be stupid to state the opposite. And so, “even if I have strong reasons to claim that the price will go up, it can still go down”.
Next, if we’ve found out that we are not “the smartest”, it also suggests that there is nothing crucial in making errors at the beginning. We will enter not according to the system (because we will wish so), we will be too lazy to consistently test the same system for a long time (I recommend special trading simulators, it will save much of your time), we won’t always observe risk management.
But we are not the most intelligent, and therefore, we do not yet know how to behave correctly in the market. Yes, we have already read in an article by an author that we should follow risk management rules, we should strictly follow our trading system, and, also, that the only secret is the steady results, but haven’t yet proved it in practice. And why should we believe someone who just claims something to be right? Why should we take someone’s opinion and recommendations as the truth? But, again, how can you know just know, right away, if I tell the truth or not? You can check it only by your own experience, during your own practical trading. So that you can compare, see and understand whether the steady results are really better than to “bet all the money a couple of times”. Or, if it is really that bad to ignore risk-management rules? And so on. To sum up, you’ll need to find out and understand everything on your own, so, treat this article as a set of recommendations, rather than strict rules.
An important moment: “I’m not the smartest” doesn’t mean “I’m stupid and understand nothing in trading”. It means “I can’t take into account everything” because the financial markets are very specific. It would be stupid to state the opposite. And so, “even if I have strong reasons to claim that the price will go up, it can still go down”.
If we learnt that we are not the smartest, that we can’t know in advance what the results of certain trading decisions will be, then, what do we need? We need something that will help us try as many trading decisions as possible with as little losses as possible.
Simply put, you need to make the “trial and error” period be the least costly for you, in terms of both money and health.
It is, unfortunately, so that, to earn money in any business, you need to master your skills first. It is boring and tiresome, and, most often, takes a long time; so people are too lazy to do it. In addition, during the process, you have to see yourself (like a fool), constantly making mistakes, and doing everything in the wrong way; it is not pleasant, of course. That is why people often try to do “a kind of trick”, seeking a way to AVOID the process of developing and improving their skills, but to GAIN all the advantages of it, making no effort at the same. Trading is just indulging that human habit, to seek “quick and easy money” with the feeling like “I’m the smartest of all”. And there it starts: they buy various advisers for 200”, which are based on some dubious algorithm; attend one training course, then, another one, and a next one, hoping to “learn the secret of the market”, and, based on that secret, to earn a billion dollars and look down on those, who are working really hard several hours a day to improve and master their skills. Of the same kind are different recommendations by “advanced traders” on the forms and so on. So, you agree with everything only to avoid the process of studying =) If you understand that without a conscious and gradual training process you won’t succeed, it will be easier for you than, for example, for me; as I am a typical member of the majority, who used to think himself to be the smartest of all =)
If you understand that without a conscious and gradual training process you won’t succeed, it will be easier for you than, for example, for me; as I am a typical member of the majority, who used to think himself to be the smartest of all =)
Well, you need to train somehow, in order to make all the possible errors and gradually develop some “conscious approach” to trading, finding out (still approximately) what really works and what is useless. How can you do it? It is simple. You should start trading. How can you cut the costs of this “training trading”? It is also simple. You should open either a demo or a cent account for this purpose. And which of them is better? Read on.
4. Demo or a cent account?
In fact, the question is wrong =) It can be compared to a question like, “30 miles per hour or 100 miles per hour?” when you are learning to drive. “Oh, look, there is a little difference, you lose cents on a cent account”, someone impatient will say. I won’t again try to discourage you, but I want to share the ideas, I base myself on.
Let’s move away from trading. When people enter any industry, they are like “a blank sheet of paper”, or “pure potential”, you may call this state whatever you want; it is when they don’t see what to do at all. So, they need some basic notions of the business they’ve started to study, and based on them, do something more complex. Take football, for example. A beginner is first trained to just run with a ball, to get their bodies used to doing new things.
Because their bodies haven’t had such experience before. Next, they will be trained to kick the ball, not in a special way, and not even trying to score a goal, but just to kick the ball correctly. At first, most balls will go the wrong way, because, again, the body HASN’T YET UNDERSTOOD how to put the feet. The body is just testing different positions and selecting the most appropriate, considering the coach’s recommendations. When they already can run after the ball and kick it, they will be trained different sweep techniques, like how to make a short/long pass, how to target the top/bottom part of the goal and so on.
But these are not all the basics, do you see? People become really skillful when they add to their technical skills (trained to be automated) their personality, that is, when they really understand what they like more: to play offense or defense; run along the flank, or “conduct” the game from the center of the pitch. And when they understand what they can do well and in what way they like to play, that is when, provided, they make sufficient effort, they become real masters.
However, it is impossible to teach someone something complex, if they do something simple, the fundamentals, the basics, in the wrong way. This “skipping” to more complicated things just makes no sense, and, finally, one will have to return and start everything again, from the very beginning, from the very basics, having lost their time.
It is impossible to teach someone to do something complex, if they do something simple, the fundamentals, the basics, in the wrong way.
Sorry, I’ve been distracted=) So, like in football, I see the process of becoming a trader like this:
1. You select a few trading systems and just trade according to them for some time (you’d better apply different entry principles, to avoid testing similar approaches). At this stage, you identify what is more comfortable for you.
2. Having tested and chosen 1-2 strategies from step 1, you go on and trade each of them in different timeframes. For example, first you try it in M5, next, in H1, and then, in D1. Again, you are to identify the most suitable for you, personally. You are still NOT aiming at “making profits”.
3.Add en element of risk management. You take the same risk for all your trades, 5% of the deposit. You may search the Internet to learn how to calculate the exact figures. It is important that all your trades are equal.
4. When you’ve found out what strategy you like the most, what timeframe is the most convenient for you, and how to risk the same amount at each trade, you just start trading with the system and accumulate statistics (only fairly). You include there all your trades, both system and occasional (“pressed accidentally”, “I was sure I mustn’t buy, so I sold not according to the system” and so on. At this step, such non-system “jumps” are a norm; the longer you are ignoring such trades and not including them into statistics, the more time you will spend on studying to become a trader).
5. Having completed 50 trades, you analyze the results of entering according to the system and non-system trades. If your system trades yielded more, it is excellent. If non-system ones turned out to be more profitable, think what you should change. First, for example, you can increase/cut stop loss size, increase/reduce take profit size, enter/exit earlier/later and so on. You can do lot in this respect. You don’t need to get only the positive results; if your system trades resulted in “-$30”, and non-system – in “-$100”, it also means that working according to the system is better than trading on your gut.
That is the worst, the most horrible “I can't go on like this anymore, spare me this, please” stage. You are likely to start thinking that everything is senseless, that you’d rather give up, that you are a bad trader, that you need to “try by little on a cent account, you may be lucky” and so on. So, your mind will suggest you various funny ideas to make you ignore your not yet super-cool results and stop suffering. If you stay earnest and pass over this stage, it will be FAR easier for you further. I, for example, finally understood that it was far less torturing if I was listening to some soft, delicate music; and I still do it (What do you think? There is no perfection in trading; you can only seek to achieve it). There are various good online radio stations; you chose some jazz or chill, make yourself a cup of coffee/tea and start trading. At least three times a week, an hour a day, and you are already on your way to success, being ahead of MANY traders at the initial stage.
6. Step by step, you will better and better adjust your trading system to the market; and, when the final result is around 0 or a little profit, theeen...
7. You need to add some elements of psychology. I emphasize that you should add psychology only at step 7, when your mind has already gained the necessary experience of system trading and analyzing your performance for each trade; so you are not that emotional in trading any more. If you try to add psychology earlier, you may just get yourself to feel even worse because of losing trades; and when you are suffering, you are focused on your pain, rather than on your training. So, you are likely to make your way longer and harder and to waste your time.
How can you integrate psychology? It is very simple; you need to start trading with real money. However, you must remember that your aim is to make your “trial and error” period cost as little as possible, in terms of both money and health. Therefore, not to suffer much from damages to your capital and your nerves, open a cent account and trade with it just IN the SAME WAY, going on developing statistics and improving your trading system.
8. When you just start trading on a cent account, you are likely to have more non-system trades, it is quite a norm. Your mind hasn’t yet adapted (and you remember that, if your body doesn’t have certain experience, it needs to try and test everything). So, don’t be upset, it is also an element of the process. With the time, you’ll get balanced and won’t feel any difference between trading on a demo account and on a real one.
9. Next, you simply go on developing statistics, improving your trading system and, little by little, increasing the volume of your trades.
In fact, that’s all a trader has to do. It looks quite easy technologically, but, it is much harder in practice. The more patient and consecutive you are, giving yourself time and opportunity to make mistakes, a loooot of mistakes, the better results you will get. There aren’t any miracles in this respect. Look around and you’ll see that in any business, if people earnestly, persistently and patiently perform any kind of job for quite a long time, they finally become the masters of their craft and can generate incomes from this. Of course, there can be super gifted people in any industry, who achieve everything faster, but they also won’t be professionals until they pass EACH step of this way with due diligence and self-commitment.
The more patient and consecutive a trader is, giving themselves time and opportunity to make mistakes, a lot of mistakes, the better results they will get.
If you want to save your time, don’t skip to the next step until you finish the previous one. I, myself, unfortunately, used to skip the stages and got no advantages; I still had to go “back” and do everything in the right way. I hope, you’ll manage to be patient and consecutive.
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