Using the demo account for better trading decisions

Discussion in 'Psychology' started by Bombardier, Nov 22, 2011.

  1. Based on the assumption that we are generally more calm dealing with virtual money (i.e. paper trading) than with real money, I came up with the following idea. As I haven't placed a single trade for nearly a month now, I still observe the ES for a potential entry opportunity. So far nothing has emerged according to my entry criteria, so I occasionally opened up my demo account to put in a few orders that would automatically execute should the price break past certain zones. What I noticed is a difference in myself. I am calmer, let's call it indifference. I do not care whether the trade works out or not. I do not care if I get stopped out after having seen some unrealized profits evaporate. And if a trade works out, I would proceed with the next trade just like that, without fear of losing my previous gains.

    Let's take it one step further. What if we routinely open the paper account first, analyze the situation objectively, and place our orders in the demo before we actually proceed to the real account and mirror the same orders in it. Would we be more objective in our decisions, and would we avoid the harmful trades done on the real account? We regard the demo account as the greenroom for our trading on real stage. When all is approved and well-prepared, we proceed to mirror the order in real. This might not be suitable for high-speed intuitive trading. I'm speaking from a position trader's or swing trader's point of view.
     
  2. i believe all serious traders already utilize demo accounts for testing new strategies and such. have you thought about back testing too?
     
  3. For testing purpose, I totally agree that you are well-advised executing on demo. I backtested my strategy and have documented my real trades in a journal here: http://www.elitetrader.com/vb/showthread.php?s=&threadid=226737

    My concern was the phase after a successful backtest and now trading your strategy with real money. I believe we are all prone to emotions and bad decisions from time to time. So even after the testing period, me might want to keep the demo running parallely. Just for psychological reasons.
     
  4. hmmm yeah it would be interesting to place your trade, and then place your demo trade with slightly different entry and exit points to fine tune your strategy. yeah, i agree, emotions can take over. i'm speculating, but i would assume that before one paper trades, the controlling emotion is fear, but after successfully testing a strategy, i think a lot of traders become cocky lol
     
  5. emg

    emg

    doesn't matter. u will still loses.


    More than 90% of small traders lose. They just lose!
     
  6. You'll definitely lose with that attitude! :p
     
  7. it is amazing how trading with real money differs so much than trading with virtual money, I guess if you could truly learn to separate emotion from your logic, trading would be much more lucrative! much easier said then done!
     
  8. This is why it is necessary to only trade with money that you can afford to lose. This is the only way to start the journey of emotionless trading.
     
  9. Lucias

    Lucias

    I did this and yes it works. But, you have to train.. it's not simply just placing placing trades without any worry of loss. The purpose is to develop a trading skill or sound strategy that can be then applied. A higher frequency style will be more useful because it relies on feedback.. at least 1 trade per day.

    The purpose of training is to develop what you are doing and make it sound to yourself so that you understand fully what you are doing. Just placing the trades is useful training as there is often performance lost from the planning to the execution phase. For example, I had a lot of trouble converting my successful predictions into trades. I can say the market is going to go up. The strategy is obvious "buy something that goes up when the market goes up". But, tactics is different. Do I want to place a binary option bet with fixed reward and loss? Do I want to place a futures bet with possibly a large loss or a large win? Or an options bet ? Do I want to bet on the NASDAQ or the S&P 500? Those are tactics. I.e How much should I risk? What if it goes wrong? There is a lot involved when ones goes from the planning to execution phase where things can go wrong.

    If you are going to execute mechanically then it will be less required because you have less to be concerned about in terms of performance alterations.

    This type of training is useful for the highly creative/discretionary approach. That's a difficult approach come to think of it. The goal of training is not to remove one from one emotion but to develop a better ability to understand the emotions and how they impact performance.

    There are really 2 approaches to trading and this really isn't elucidated clearly when people talk about it but they are somewhat different:

    1. Turn-based or planned approach. A trade is planned in advance and executed.
    2. Real-time approach. Market conditions are monitored real time and opportunities are identified and taken. Trading is thus the objective of capitalizing on short term sentiment using advantageous pricing.

    I started with the turn-based approach and had great success. I now use a mixed approach. The turn-based approach is less sensitive to performance pressure. However, one isn't able to make use of most recent information.

    If you are using the turn based approach then the principle of training would be similar, plan the trade and execute. But the purpose of any training is to crystallize the sound methodology and approach. This is more useful if one is a highly creative/highly discretionary trader. I have multiple methodologies and I've tried to burn into my brain, forever, the success methodologies. The risk is always style drift. One can also systematize a method by taking core repeatable elements and turning them into an approach/methodology.

    As one can imagine the turn based approach isn't as subject to performance pressure as a real-time approach. The real-time approach is where training is more beneficial. Just think of it as a turn-based strategy game where each turn is some reasonable interval.. versus a real-time strategy game.
     
  10. emg, just because you're a loser doesn't mean that the 10% of elite traders who post here are like you. I would suggest you get a job and quit trying to make it as an independent trader since the only time you post is to complain. Perhaps you could apply at Goldman or UBS since they are notorious for hiring losers.

    otherwise, you may want to experiment with paper trading. I spend more time in my paper account than I do in my real account. Keeps me out of a lot of crap, and it becomes pretty obvious when something is going to work.

    My paper account is a leading indicator.
     
    #10     Nov 25, 2011