Page 1 Copyright 2013 Zantrio, LLC. All Rights Reserved.

Transcription

1 Page 1 Copyright 2013 Zantrio, LLC. All Rights Reserved.

2 HOW TO EFFECTIVELY USE A DEMO TRADING ACCOUNT I've spoken to many day traders, new and veteran, and they all agree that a demo trading account is vital to their business, especially when starting out, changing trading system, or testing new strategies. But, too often, I've heard the complaint "I wish I'd made better use of the demo trading account." In fact so many times, that I started to think about how a demo account could be used most effectively. After scribbling for a while, and thinking about my experiences as well, where I went wrong and where I went right, I realized that successful demo account use came down to two key areas. First is ensuring there are clearly defined aims of having that demo account in the first place, and second is using that demo account to its best advantage. Page 2 Copyright 2013 Zantrio, LLC. All Rights Reserved.

3 AIMS OF USING A DEMO TRADING ACCOUNT All traders, whether they realise it or not, will use a demo account to achieve two aims. The first, and perhaps most obvious, is to test a trading strategy. The second, less obvious, but just as important, is to get used to the functionality of the trading system. If the system doesn't do everything you need it to do, then that trading strategy probably won't work out well. So, it's with the functionality side that I'm going to kick off. FUNCTIONALITY AND TRAINING DECIDING HOW A STRATEGY WILL WORK IS NOT ONLY ABOUT PRICE MOVEMENT, BUT ALSO ABOUT ORDER ENTRY AND POSITION MANAGEMENT. Deciding how a strategy will work is not only about price movement, but also about order entry and position management. And then monitoring all this includes ease of use on screen. So under functionality, a trader should be looking to test, at a minimum, the following: TYPES OF ORDER, AND ORDER MANAGEMENT Will the system support the trading of orders such as limit orders, stop orders, fill or kill, at market, contingent orders, etc? Will it allow all orders in the market to be monitored at the same time, and will it allow parking of orders? SCREEN LAYOUT Is the screen layout easy on the eye? Can it be customized, resized, and minimized? Can one layout be replicated to another security? Is there an overall trading position window, showing the state of play at all times? Page 3 Copyright 2013 Zantrio, LLC. All Rights Reserved.

4 TRADING TOOLS Is there a news-feed, and how good is it? Does the system provide a charting tool, and do the charts update real-time? Does the system support trading indicators, or chart management tools? Is the order management system mouse or keyboard driven, or both? Is it easy to look up and display different securities? RECORD KEEPING How dynamic is the record keeping window? Can it be customized as to color and layout? What about hard copies-- can these records be printed out easily? Does it give you all the information you need? TESTING THE TRADING STRATEGY Now that the aims of using a demo account have been clearly defined, it will be time to put into place the testing of a strategy. There are some must do's when putting this test into practice: KEEP IT REAL Don't stray from the strategy. If you do, you will never know how successful, or not, it will be when its unleashed into the real world. A major reason for using a demo account is to take the emotion out of trading. Its easy to execute an order on a gut feeling, because it looks right at the time, and that gut feeling might prove profitable. But operating this way will never prove the strategy, and only lead to a greater risk of losses in the future. Forget that it is only a demo account. This leads on to the second point. Page 4 Copyright 2013 Zantrio, LLC. All Rights Reserved.

5 BE DISCIPLINED Although it's a demo account, if the strategy being tested calls for a pre open trade, then the trader had better be in a position to execute that trade. He should also ensure that trading size, limits, frequency of trades, are all as they would be in the live environment. KEEP A RECORD Over and above the records held on the trading system, a good trader would keep his own daily trading journal. Particularly when testing a new strategy. All the usual suspects should be noted here (trade direction, time, size, etc), as well as profit and loss. But also add in a column for your state of mind at the time of the trade. Strategy trading is designed to eliminate emotions, but it's surprising what difference a recent argument can have on a trader! IMPROVE THE STRATEGY A demo account is the best place to test a new strategy, and then improve it. Doing so requires five steps: Plan it -- this will already have been done, which is why the trader has opened a demo account; Trade it -- play the strategy 'for real' in the virtual world; Record it -- keep a log of results; Analyze it -- using the trade log, and all available records, identify the strengths and weaknesses of the strategy Improve it -- from the trading analysis, and the identified strengths and weaknesses, improve the strategy. For example, if every trade executed between 10am and noon on every trading day is a losing trade, then don't trade them! Page 5 Copyright 2013 Zantrio, LLC. All Rights Reserved.

6 IN CONCLUSION When a trader has developed a new strategy, and back tested using historical data, the temptation is to get in and start trading as soon as possible: especially if the trader is trading successfully already. This gung-ho approach can only lead to unnecessary losses. It's wise to take time over testing and improving a trading strategy, perhaps weeks or months. This is best done using a demo trading account with real time data. For those new to the trading system, the demo trading account should be used firstly to acquaint oneself to the system and its functionality. The temptation will be to 'learn as you go.' It's far TRADE THE STRATEGY AS IF IT WERE TRADING LIVE, AND LEARN FROM THE RECORDS KEPT. better to take a day or two to learn how to place orders, manipulate screens, and keep records, before entering the strategy-testing phase. A disciplined approach to using a demo account should be used. Trade the strategy as it if it were trading live, and learn from the records kept. Always look to improve the strategy, but give it the time to prove itself. If you identify consistently losing trades, then cut them out. Always use a demo account to test new strategies. Many providers have a time limit on their demo account. If you trade via one of these, and want to test a new strategy, ask for the demo account to be reinstated: they want your business, after all. Finally, for those trading already, there will be times when the trading strategy employed just doesn't work. Every trade seems to be a loser. For months the strategy proved successful, and pumped in profits, but now it seems that the strategy is broke. At this point it's easy to lose faith and begin trading irrationally, trying to fix something that isn't actually broken. This is the worst thing a trader can do. Instead, move the strategy onto the demo account, and when it starts producing the goods again, then it can be moved to the live account with renewed confidence and a minimized dent to profits. Page 6 Copyright 2013 Zantrio, LLC. All Rights Reserved.