Embracing losses – why demo-trading won’t validate your trading system

Embracing losses – why demo-trading won’t validate your trading system


How do you deal with losses in your trading? Most traders don’t know how to properly handle losses which typically leads to even more bad trading. This cycle then repeats itself until the sloppy trading behavior is deeply ingrained into a trader’s routine,  making profitable trading even harder to achieve.

Do you make instant changes to your trading system after each loss? Do you look back with the benefit of hindsight and try to see how a loss could have been avoided using different indicators or tools? Do you go back to back-testing new ideas and systems that promise a more accurate strike rate?


You can have 10 losers and still have a winning system

Did you know that you can have 10 losers in a row and still have a winning system at your hands? The outcome of a trade is totally random and even if you know the winrate of your system, you can’t make any claims about the nature of losing streaks. Over the short-term, the winrate does not provide any value; losing and winning streaks are out of your control and even the best system will experiences streaks regularly.

A better question to ask is “how did I end up with a loss?” Did you make any mistakes? Did you break your trading rules? Or did you do everything you were supposed to do, followed the plan and executed your trade according to your rules? If that’s the case, a loss should not be seen as something bad, but just as something that happens all the time.


Learning curve – Don’t change systems

Changing systems is the worst thing you can do as a trader who is serious about pursuing a long-term trading career. Every time you change from one system to the other, you start again from zero. You have to re-learn everything again: how you set your stop loss orders; what is the best way to determine your profit targets; under which conditions does your system work best; how do you manage scaling in and out of your positions; does it work best during high or low volatility; which are the best time frames to trade with your new system, and so on.

You can easily find out how serious and determined you are as a trader by asking yourself the following question: “have I changed my trading system more than once during the last 6 months?” If the answer is yes, you are most likely not ready yet to make it as a trader and you are still looking for shortcuts.


Demo vs. Real vs. Back-testing

How do you validate your trading system? Most traders go through the same process: they pick a new system, see if it performs well on the simulator; trade it on demo and see if they can get a few winning trades. Then they test it in the live markets with real money. But why don’t demo results translate into live trading results? The following points highlight the weaknesses of demo and simulator trading:

  • With a simulator, it is very easy to fast-forward uninteresting market periods. The difficulty of live trading is sitting on your hands through such periods. The fast-forward mode creates a wrong mindset and thinking. If you can back-test several months’ worth of trading in a single day, you create a wrong mindset.
  • Demo trading should be limited to the least amount possible. The reason is that demo trading eliminates all the factors that constitute live trading; you eliminate emotional influences and block out the negative feedback from losses.
  • Traders who spend a lot of time on demo or the simulator adopt a sloppy trading approach and can’t take live trading seriously anymore. Traders then carry over behavioral and thought patterns from demo trading to their live trading which inevitably ends in inconsistent results.


The professional approach of the serious trader – 8 steps to potentially better trading

The professional trader does not have better trading tools and he does not possess secret knowledge about how the “big boys” trade. There are a few key principles that separate the professional from the amateur that you can start applying right now:

  • Immediately stop changing systems. Stick to the one you have and make it work
  • Don’t make changes on your system on a trade to trade basis
  • Adjust individual parameters of your trading method based on sound performance analysis
  • Start logging your trades and recording your behavior
  • Find out what your losses and winners have in common. Eliminate what doesn’t work and do more of what works
  • Stop judging your performance based on the outcome alone. Evaluate the quality of your trading decisions
  • Limit demo and back-testing to a minimum
  • Focus on one thing. Become a specialist in one area instead of trying to do too many things at once; pick one market, one system and become the expert in that field

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results. 



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