Trading Update: Simulation Trading and the “Missing 15%”

One of the big challenges of trading is in addition to figuring out a trading method that gives you an edge, you have to accurately apply that method during real time action. This was a problem I was experiencing with my upgraded trading methods. When analyzing past market behavior, I was able to apply my techniques to see that they have accurate predictive capability. However, when I attempted it during real time trading, I’d wind up not trading nearly as well as my past method analysis led me to believe.

The problem I was experiencing lies in the lack of complete information when looking at and analyzing past chart data. Looking at a completed chart of data is different than trading a chart that’s updating real time. Little idiosyncrasies in second to second movement can’t be seen on a historical chart plot, and it’s those movements that take place during real time that serve to add some confusion to the mix.

Studying historical charts is very helpful, but can only go so far in perfecting one’s techniques. Perhaps one can get around 85% -90% of one’s method by carefully analyzing the past, but real time trading is needed for refinement and capturing the final 10% – 15%.  Only having 85% or so of one’s method can lead to making a series of little mistakes during trading that turn otherwise winning trades into losing ones. Knowing you are so close, but being stymied by little mistakes can be frustrating as the little bugs are smoothed out, not to mention expensive as losing trades also means a loss of capital.

Enter simulation trading. The older term for it would be “paper trading”, dating back to the time where instead of placing actual trades, one would write down when they would make a hypothetical trade. Advances in technology eliminates the old style paper trading and in its place is a simulation trading account that is identical to a real trading account. The only difference is you are using “sim” dollars as opposed to the real thing.

Most traders don’t like to use sim trading because they’d rather be trading the real deal, and I’m no different. It’s funny that I always recommend that traders having difficulties use a sim account until they can fix their problems rather than continue making bad trades and losing money, but very few if any take me up on that advice.  Well this time I decided to listen to my own advice and trade on the sim while I worked on fine tuning my methods under real time operations.

Now the biggest real caveat of sim trading is that since there is no threat of loss of real money, an argument can be made that one won’t get the complete trading experience. One needs to be able to deal with the fear of loss on a daily basis to master trading. However, I found that trading live is so ingrained into me by now that I still feel a little fear of loss even when sim trading. To help insert additional “fear of loss” to sim trading, I add rules such that I have to be generating consistent profits on the sim account before I can move back to the live account.

By using the sim account, I made a big discovery- it’s a perfect environment to work on the mechanics of a trade without letting the fear of loss of capital get in the way of one’s analysis. My mind could stay focused on why my trade worked or why it didn’t work without getting distracted by real money profits or losses.

By being on the sim, I was able to trade much more frequently, and let me tell you, there is no substitute for hands on experience for refinement no matter what skill you’re learning. Your focus is sharper and you notice so much more. It didn’t take too long before I found the missing market “nuances” that I couldn’t pick up with historical maps nor with limited real time trading. It would have taken me a much longer time to figure out what I was missing trading a real account since I wouldn’t be trading as often.

As a result of my discoveries, my sim trading losses have started turning into gains and I now feel comfortable moving back to my real account with a much more refined system.  It’s amazing what a difference that extra 10% – 15% can make in sharpening the accuracy for trading entries and exits. Lots of “aha!” moments.

For new prospective traders, it makes no sense to trade a real account until one can prove their methods work on a sim account, but it’s hard to resist the siren call of making actual trades with real money on the line.

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