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Guest Post from Ray Burke of Indicator Warehouse

TradingPub Admin | October 29, 2012

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Thanks to Ray Burke of Indicator Warehouse for the following guest post:

Learn to Day Trade | Your Simulator IS NOT a Toy

I was recently working with a client that was learning to day trade; I offer one-on-one coaching at Reality Futures Trading over the phone as well as onsite in my Denver offices.  Often when I work with my students I will log onto their computer to see what their charts look like and it makes it easier to understand where they are coming from and what they are seeing.  One of the biggest mistakes other than too many indicators on the charts that I see is people using their simulator in an unrealistic manner.

You’re probably saying “gee Ray, why does it matter”?  “It’s NOT real money”.  You are right, simulated day trading is not real money, but it is the closest thing you can do to live trading.  Yes, it’s true that live trading is different from simulated trading, but if you are just learning to day trade, trying out a new strategy, or testing a brand new day trading system, it is always best to do so in a risk free environment.  Also, the answer is “yes” to the question “can the fills be different”?  This can be a challenge when moving from “sim” to live trading, but the biggest challenge I find is more psychological.

So how do we use our day trading simulator to help us get over this hump?  At the beginning of the article I mentioned that most people treat their simulator as a toy, how do they do that?  The biggest error I see traders make is that their simulated account does not equal what their live account is or will be when funded.  If you are going to start day trading your real account and it will be $10,000.00, when testing your systems and strategies your simulated account should reflect what you REALLY will be working with.  My point is that your simulated account should match whatever your real account is going to be.  The question is how can we expect to get realistic results from our testing if we are trading a $100K account when in reality we will only be working with $10K?  Realistic testing is a key ingredient to good money management.

Also, when trading your simulated account, do your best to mentally convince yourself that your sim account is real.  Another big mistake I often see people make is that because they fail to treat the simulated account as real, people develop a mindset there will be “do-overs” like you can do in sim; bad trade, foolish trade, over leveraged trade and it fails……oh well, “it’s not real”, and they just reset their simulated account and the same mistakes are repeated over and over.  The idea that I am trying to drive home here is that in real, live day trading, there are NO do-overs; a loss is a loss and you have to live with it.

The best practice I feel traders need to do is treat the simulated account as real as you mentally can.  Only take valid trades that fit your day trading strategy and rules, and always, always, document your results.  By treating your simulated account as if it were real (as real as you can) I believe that you give yourself an advantage when you are ready to day trade with real money.  Look, if the Air Force wants you to fly one of their multi-million dollar planes, you will need to learn in a simulator.  If you do crazy stuff in the simulator that causes the plane to crash do you really think they are just going to throw you the keys to an F-15?

Trading is a serious business and it needs to be treated as such; if you are willing to “play around” with your simulated account, I feel you’ll develop bad habits that condition you to play with your real account.  Just like a fighter pilot, it’s best to develop good habits in the simulator if you are going to have good habits for the real thing.

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Risk Disclaimer: Past performance is not indicative of future results. Futures trading involves substantial financial risk. Views of guest commentators do not represent those of TradingPub.com. Article intended for educational purposes only and not meant in anyway as a solicitation to buy or sell certain securities. Please consult your personal financial adviser before using this information for your own trading purposes.