What you need to know before you open a live trading account

It’s good to practice in a safe environment.

You may have already seen the viral videos showing how a Japanese zoo plans for animals escaping in the event of an earthquake.

The drills involve zoo employees dressed up in furry animal costumes, ‘acting’ out the roles of the escapees.

There’s the unforgettable Oscar-winning performance of the polar bear shot with a fake tranquillizer gun …

 

There’s the runaway zebra who looks like he’d be happier in musical theatre …

 

Not to even get onto the lion … the chimp … and the rhino …

But the objective is to test out scenarios, in a relatively ‘realistic’ but safe environment. And that’s exactly what we should be doing in a demo trading account.

I’ve had a number of emails recently, from Traders Bulletin members who’ve had trouble getting their first trading accounts open, so I thought it would be a good idea to run through what your knowledge and experience should be before you start live trading … and how you get that know-how and experience in the first place.

What’s a demo account?

A demo account looks almost exactly the same as a live trading account. You log into your broker, and will have access to charts, and can open positions through trade tickets, just like a live account.

Your broker will generally load a few £thousand of ‘play’ money into this account, which you can fritter away as you please.

No one’s watching over your shoulder on your demo account – you can buy and sell markets as you like. But that doesn’t mean you should be completely reckless with them – it’s a training ground, so is best used that way.

What to do in demo mode

How you use a demo account will depend on your level of experience …

1. Starting out: If you’re completely new to trading, have a play around with the trading tickets. Open some buy and sell trades, to check that your understanding of risk and reward is right. Are these trades closing at the levels you expect them to? If you’re winning or losing more than you expect, then perhaps you’ve got something wrong with your staking levels or your pip calculations.

2. Getting practice: Once you’re comfortable with the basics of placing trades and positioning stops and targets, start using your demo account more formally, running strategies as you would in a live account to test that it all works as you’d expect.

3. Testing results: Demo accounts can also be used to check whether a strategy is profitable. This will involve trading in demo mode for longer, so you have a decent timeframe to check results again. No matter how long you’ve been trading and how experienced you are – this will always be a great reason to keep using demo accounts. However, there’s one important limitation with doing this, which I’ll cover next …

What demo accounts can’t tell you about profits

Brokers often  use a different data feed for demo accounts and live accounts. This means that the prices you see in one account won’t necessarily be the same as in the other account. Most of the time, this doesn’t make much difference, but if markets are moving quickly, it can have a big impact on your trades.

Demo accounts don’t tend to suffer from slippage. If you place your stop on a trade at 5500 in a demo account – that’s where your trade will close. If you place your stop at 5500 on a live account, and the market is moving quickly – you could be taken out of that trade at a worse price.

This means that a strategy that works beautifully in demo mode won’t NECESSARILY work in a live environment. It will need live testing to prove that.

What demo accounts can’t tell you about yourself

Demo accounts cannot tell you how you’ll react when your real hard-earned cash is on the line. Will you keep disciplined in the midst of a losing run? Will you get reckless on the high of a run of winners?

Only live trading can tell you these things.

So, what do we need to be ready for a live account?

I’m going to split these requirements into two categories: the things your broker requires of you AND the sensible things you should require of yourself.

1. What your broker requires

The brokers are obliged by FCA rules to assess your suitability for an account. If they don’t run these checks, they could risk their license. It could be argued that this is just a box-ticking exercise for them, but these checks are there for good reason. Unlike the ‘betting’ some people may be used to … a spread-bet stake of £1 can lose considerably more than just £1, so it’s important that any clients understand this.

Brokers check your understanding by running through a series of questions. These can seem a bit daunting … like asking you if you’re trading more than 40 times a month … and you’d be right to question how you could do that if you’ve not yet managed to open your first account!

So, to ensure you’re qualified to get an account, these are the things you need:

• Some money you can afford to lose (it doesn’t need to be £thousands) – a few hundred is plenty (and sensible) for anyone just starting out.
• You MUST understand what margined trading is, either through experience of placing trades on a demo account or by following an independent trading course. You can find the Trader’s Bulletin online course here. (Don’t worry, this is just 3 bite-sized lessons that take less than half an hour to complete.)

2. What you should demand of yourself

So, your broker has given you a brand-new live trading account … you’ve put some money into it … does that mean you’re ready to go?

In addition to the points above, I’d add the following tests to be confident that you’re ready for live trading:

• Are you consistently following your trading rules in a disciplined way in your demo account?
• Are you happy with the trading results you’re seeing?
• Are you comfortable with the level of risk you’re taking (I ALWAYS recommend starting small – there’s plenty of time to increase stakes as your trading progresses).
• Do you have a plan to limit losses in the event of a serious drawdown?
• Do you understand what your broker’s charges are (this could be spread costs or overnighting charges)?

Ongoing testing

It’s important to bear in mind switching to live trading is STILL part of the testing process – keep monitoring results for any discrepancies between the two platforms, and keep a check on yourself for any changes in the way you trade when there’s real money on the line.

In fact, I’d go as far as to say that we should never become complacent and feel that we’re ‘done’ with testing. Markets are always changing, so we should keep vigilant for changes to performance throughout our trading careers. Successful long-term traders are those who adapt and keep learning.

 

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