Michael Taylor explores the hidden problem with demo trading – not the lack of skill, but the absence of emotion. He explains why finding the right balance of risk is essential for developing discipline, consistency and long-term trading success.
Demo accounts are the source of contention amongst traders. Some say they are a way to learn to trade without risking real money. Others say they can never replace the real thing, because it is completely different.
In a simulated trading environment, you know you can just add more ‘money’ to your demo account if you lose it. It’s not real, and there’s no cost to you. Because of this, you will either trade perfectly because there is no emotion, or trade terribly because there is no emotion. Both can be true.
Without emotion, you are detached from the outcome of the trade. So closing a stock when it’s hit your stop is easy. It’s not so easy to do it when you see you’re down £400, and suddenly you’re thinking that’s an overnight spa hotel stay with a lovely restaurant and a huge buffet breakfast. Your brain immediately switches into risk-seeking mode in order to avoid booking the loss. You tell yourself that “you’ve not lost until you actually sell”, which is, of course, baloney. The only true marker of P&L is mark-to-market and if your position is showing you a loss, then you’re already at a loss.
But one problem traders also have is that they are too emotionally detached, and because there is no emotional investment they can’t take it seriously.
You need to ask yourself what you respond to best.
My own suggestion for traders is that they use the demo account in order to learn how the platform operates and how all the buttons work. There’s no point losing money because you didn’t know what to press.
But once you’ve done that – get off the demo. It’s not real.
You need to find the sweet spot of risk between what you actually care about and what doesn’t hurt you. I’ve had traders tell me “Oh yeah, it was just a £50 position and I thought I hadn’t made enough money on it, so I just left the position open” and “Well the position was only £100 so I thought I’d just leave it until it comes back”.
This is obviously not conducive to trading success.
But you also don’t want to be putting so much down that you’re too emotional with the stock and are the rabbit in the headlights when the stock falls, or you get far too greedy seeing a big profit.
Here’s a 5-step framework to ask yourself when you’re considering your position size.
Step 1 | Am I sticking to my rules consistently and without fail?
If you can’t stick to your own rules, then the position size is obviously wrong. It’s either so little that you’re not emotionally attached to it, or too much that you’re in fear of your P&L. Calibrate this appropriately. If you can’t stick to your strategy, then you have no hope when it comes to trading.
Step 2 | Am I managing my emotions well?
Be honest here. If your emotions are all over the shop then you can’t trade. You need to be in control. If it helps, consider a brief meditation such as on Headspace. You can find these for free on YouTube and they help to lower your breathing rate, which calms the body and reduces stress.
Stress in trading amplifies all emotions and can cause you some serious damage.
Step 3 | Is my home life affecting my trading results and vice versa?
You need to compartmentalise your trading. If you have a bad day, then allowing it to seep through into your personal life and/or professional life is going to cause you even more stress.
If you have a string of a few losers, just accept it. It’s not the end of the world, and you shouldn’t be trading in enough size for it to bother you anyway.
Likewise, if you’re seeing heightened stress in your personal life, it’s often a good idea to consider closing all positions. Grief, divorce, redundancy, all of these and more can trigger a person into doing things in the market they wouldn’t usually do.
Step 4 | Am I logging all my data and making sure I’m taking optimal decisions?
Most traders don’t log their data. Most traders don’t generate positive P&L. There is not only a correlation here but a causative one too. If you’re not collecting gold, then you have no idea if what you’re doing is actually productive.
Step 5 | Am I getting the best out of my broker and software?
Make sure you know all the functions on both your broker and your software. If you’re not sure of something, you can book in a 1-on-1 training call with ShareScope to ensure you’re getting the best out of it.
Michael Taylor
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This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.
