When to Switch from Demo to Live Trading (real capital) – TradeThatSwing

You’ve been researching and practicing a day trading strategy using historical charts or a demo account. How long should you do this for, and when should you switch to live trading with real capital?

Here’s a checklist for when you are ready to go live, along with tips to make your demo trading the most useful it can be, and tips for transitioning to real capital.

I discuss transitioning to live swing trading at the very end of the article.

To-Do Checklist Before Going Live Day Trading

The following is the minimum you want to do before trading real capital with a strategy.

  • Find at least 50 trades for the strategy you’re using and mark them on the chart, noting the entry, stop loss, target (or other exit) and writing down how much the trades made in terms of R. This should be done even before demo trading on live data, since you you want to get a handle on how the strategy works.
  • Once trading a strategy in a demo account on live market data, you should be profitable over at least a one-month period, and/or over at least 50 trades before considering trading with real capital. Until we understand and implement the strategy profitably, there is no point risking real capital. There’s no pressure in a demo account; trading real capital will be harder.
  • Make the demo trading experience as close to real as possible.
    • Only use the amount of capital that you’ll be using when you trade live. If you’ll be trading a $5,000 account, practice with that, only using $5,000 of the funds in the demo account. Don’t trade the whole $100,000 (or whatever they give you) because that doesn’t resemble what you’ll be doing in the live account.
    • Only take trades you would take live. Only trade the strategy you are practicing; no random trades.
    • Respect your risk limits. If you have a maximum daily loss and you hit it, stop placing trades in the demo account for that day. You can still watch the charts and mark trade setups on it (still good practice), but don’t actually place the trades in the demo account.

      If you were trading live, you would be done, so follow the same rules in a demo account. This helps build your discipline for when you go live. It also helps the demo account reflect the results you would get with live trading. If you don’t trade the same way in the demo that you would live, then you have no idea if you are profitable or not, and thus you aren’t ready to go live.

    • If you are profitable because of some lucky trades in the month, or as the result of mistakes (you took a position size 10x what you were supposed to, and it worked out), don’t count those trades. You should be profitable based on typical trades, not random luck.

      Include all your losses, even if they were mistakes. We need to reduce mistakes before trading with real capital.

  • Make sure you can position size correctly for your strategy, quickly and efficiently, in your trading platform.
  • Make sure you know the platform you’re on well. If unsure of something, try it out in the demo before using real capital.

Be honest with yourself. Are you trading the strategy well and profitably? If you aren’t, switching to live only hurts you, no one else. Any losses you incur “experimenting” while live trading will need to be made back before you start making money. Save your capital for when you are ready.

Need some help getting started with your day trading? Want an explosive strategy to focus your efforts on? The Price Action Stock Day Trading Course shows you what stocks to trade, when to get in, when to get out…and you can do it in less than 30 minutes a day (trade longer if you wish).

Transitioning to Live Day Trading

You now have at least a month of profitable demo trading and you are ready to go live.

Think about the position size you will eventually be using, mainly whether you will be risking 0.2%, 0.5%, or 1% of the account per trade, etc.

Start out only risking 0.1% per trade for the first week of live trading.

Trading real capital takes more of a mental toll than demo trading, and we tend to think more about the money since real money is now on the line. This can cause us to deviate from our strategy.

Keep the position size small at the beginning so you are less likely to think about the money and just follow the strategy.

If you are profitable after the first week, increase the risk to 0.2% per trade for the next week.

If unprofitable for the week, drop back to 0.1%.

Continue this process. Increasing risk per trade by 0.1% after a profitable week or dropping back down during an unprofitable week until you cap out at your desired risk level per trade.

There’s no need to risk more than 1% on a trade. You can make monstrous returns risking 1% per trade. If you think you need to risk more than 1% per trade, you likely don’t understand position sizing and/or the strategy is not very efficient.

It may take several months to get up to your desired position size. That’s ok. By reducing risk when you start out you’ll have more capital available when you get the hang of it and start performing well.

With live trading (or even demo) our only job is to wait for quality setups based on our strategy. It is not about making money or trying to be active; we are as active as our strategy and trade signals tell us to be.

When I am trading, I try to never think about money. My only job is to follow my process for finding quality trades. If I find quality trades, and avoid poor-quality setups, the money flows in. If I think about money, I’m more likely to deviate from my strategy, which means I’m not focused on finding quality trades, and performance suffers.

If your mind is going crazy with money on the line, join the club. That happens to almost everyone. Here are some tools to help.

  • Meditation helps calm the mind. I view trading AS meditation, so by practicing meditation we’re actually practicing specific skills we use in trading.
  • We aren’t just a trader, there are many different parts in each of us, such as the perfectionist, the mother, the father, laziness, anxiousness, a part that wants to be rich, a doubter, and so on, and so on. Different parts can sabotage what our trader is trying to accomplish. When we align these parts of ourselves, we have less inner conflict and we’ll trade better.
  • Finally, we can try to will ourselves to not feel a certain emotion or take/avoid a certain action, but willpower only lasts so long. If we change our identity (how we view ourselves), then we don’t need willpower, and we probably won’t even think about what was problematic for us before. Identity work is the most powerful catalyst for change I have found, and it works great for resolving trading issues.

I try to keep my thinking mathematical. Day traders can make a lot of money simply by focusing on the process and maintaining certain trade statistics over many trades.

Learning New Day Trading Strategies

Only strategies you know well and can trade profitably are traded with real capital.

If you are learning something new, practice finding the setups on historical charts, and then trading them in a demo account.

Or…

While you are trading the strategies you do know in your live account, you can mark the NEW strategy trades on your chart. This way you can practice the new strategy on live market conditions while still trading (hopefully making money) the strategies you already use. Don’t actually place trades with the NEW strategy till you know it works.

Once you have proven to yourself that you can trade the new strategy effectively—added up profits and losses over at least 50 trades—start trading it with real capital (possibly with a reduced position size) alongside the strategies you are already using in your live account.

Why Go Through All This?

Why go through this whole process? Why not just take a course and start placing real money trades right away?

It takes almost everyone AT LEAST six months to be able to implement ONE strategy decently.

For many people, it will take one to two years to trade a strategy well. That’s just the facts. So if you start using real capital out of the gate, even with a fantastic strategy, chances are you will have lost your account by the time you are just starting to get the hang of it. You’ll be discouraged, and look for something else, not even realizing that this is normal and losing money was totally avoidable by simply practicing in a demo account until profitable (and then starting live trading with a very small position size/risk-per-trade).

Each strategy has nuances, that maybe even the person teaching you the strategy is unaware of. I try to make my trading courses extremely thorough, yet questions still arise from students implementing them.

Each strategy takes time to learn. I spend many hours testing a strategy on historical charts before it is ready to be traded with real capital. Even though I’m profitable with other strategies, I still need to take time to learn how to be profitable with the new one.

Luckily, learning new strategies is generally much quicker than learning our first. Once we can trade one strategy profitably, we can generally learn strategies quicker because we already know how to execute orders, have discipline, and have a process for finding good setups and avoiding bad ones. We have most of the tools already.

I recommend people learn one strategy at a time. Get good at one before learning others. Learning one is easier than learning a bunch at once. We can get to profitability quicker by learning one.

Then we can add in other strategies when we are ready…and since we have mastered one strategy already, adding another one is usually a much quicker process. Learning two strategies, one after the other, will produce profits much quicker than trying to learn two strategies at once.

How I Started Day Trading and When I Went Live

Above, I discussed a good process for practicing and transitioning into live trading.

My belief is that one should spend only the required amount of time in a demo account—to start seeing some profits with a strategy—and then switch to real money with small positions. The position sizes gradually build if, and only if, positive results continue.

There is no reason to spend more time in a demo account than needed. It does not mimic real trading, because there is no emotion or risk involved. Trading is largely a mental battle, and that only plays out when money is on the line.

When I Started Day Trading in 2005

My trading career began at a proprietary stock day trading firm in 2005. That means they give me money, I traded it, and they took a cut of the profits.

I was taught how to use their trading platform, and then I traded in a demo account for a couple days just to get used to the system.

We then immediately moved to live trading. I didn’t even have a strategy yet. I was allowed to trade 100 shares per trade, and I could lose up to $10 PER DAY (no including fees), not including commissions. I was only allowed to trade Walmart (WMT) and another slow-moving stock that no longer exists.

Basically, they wanted you to watch and interact with price action, and develop your own strategy and way of making money.

If I was profitable on a day, the next day I could trade 200 shares and lose up to $20. Profitable days increased the amount that I could lose and the number of shares I could trade. A losing day meant dropping back down to the prior level.

If you hit a goal for the day, you move up two levels. The goal was the positive of the risk amount. For example, at level 2, I could trade 200 shares and lose up to $20, and the goal was $20.

At level 10, I could trade as many shares I wanted, but my daily stop loss was still $100 (and kept going up with each level).

Making $2000 in a month is when the reigns came off. There was no longer a fixed daily loss limit, rather the loss limit was roughly equal to my average winning day.

After about 1 year of trading I was averaging $1,000/day and so the amount I could lose in a day was also roughly $1,000.

So my journey was a little different than what I recommend to others…but not that different.

I didn’t trade the demo account for very long, but my DAILY risk was extremely limited when I started. $10 per day! But that actually makes sense for my first few days of live trading ever. With a decent method the position size could escalate quickly and so could my daily stop loss…but only if I kept being profitable.

When trading 100 shares, that essentially means that the price can’t drop more than $0.10 against you. I would take many trades per day, cutting losses at $0.02 or $0.03 if the price didn’t move as expected. And taking profits at $0.03 to $0.06, for example. And if something was running, hold it until it the momentum dies.

This may seem crazy, but it taught me to watch price action. To find entry points that put me into profit very quickly, and if the trade wasn’t working, cut it.

I still use extremely tight stop losses compared to what I see most people using. It taught me to see turning points in price because I couldn’t afford for my timing to be off or to hold through a drawdown. You nail the trade or you get out and wait for the next opportunity.

Losing or making $2 or $5 per trade doesn’t seem like much. But after a few weeks under this model 100 shares could turn into 1,500 shares…and now you are holding for bigger gains, like $0.10 or $0.15 which is $150 to $225 per trade…but still cutting losses quickly. I would do this all day, taking many trades per day.

The end result was averaging over $1,000 in profits per day (after fees)…after starting a year earlier only being able to trade 100 shares and only being allowed to lose $10 per day. Keep the big picture in mind…what you’re building towards.

Maybe you want to try something like that yourself.

Now I risk 1% per trade to make 2% to 3% on my account…still multiple times per day. The numbers have changed but the overall concept hasn’t.

My Process When I Started Day Trading Forex in 2007ish

While I was still trading stocks with the firm, I became interested in forex. I started trading it in a personal account.

I was reading trading books and learning these people’s (bad) ideas. They were talking about indicators and how day trading was impossible.

While I was making money in stocks, I thought “These people writing books must really know what they are talking about!” So I tried some things in these books and deviate away from what I knew worked: mainly cutting losses very quickly (small stop loss like I use now) if a trade didn’t work.

I DIDN’T start out slowly. I just started hammering away thinking because I was good at trading stocks I could just jump into forex.

I probably blew through 3 accounts, small ones…like $2000 each, because I was no longer doing what made me successful in stocks.

And trading my personal account was different than trading at the firm…there was no oversight and no one telling me to watch my risk. The small account size (which was smart because I was learning a new market) also made me too aggressive because I was trying to make big returns like I did in stocks. My daily average gain in stocks was almost my whole account in forex.

So starting with a small account was a good idea. Only deposit a bit. If you do well, you can always add more. But if you deposit it all, and things don’t go well, you might be finished.

I went back to demo and then transitioned more slowly into forex…taking smaller position sizes and slowly working up only if profitable. That worked much better.

I also went back to my own methods, focusing on price action, getting in near turns, and cutting losses quickly if it didn’t play out. I capped my daily risk and worked to be profitable within those tight confines. Basically, I couldn’t lose more than three trades in a row (with tight stop losses) or I would be done for the day. On that tight of a leash, you get very selective. I maintain that rule today.

As the profits came in, I also wired more money into my account. Basically, my results told me to keep increasing position size (rising up to 1% of the account) and also that I could deposit more. This increased the income from the account, and I eventually left the firm to trade for myself around 2010 or 2011.

If you take my EURUSD Day Trading Course and my Price Action Stock Day Trading Course you will see the strategies are similar, but the markets are different so we need to take that into account. The stock market has an explosion of activity at the open…forex doesn’t have that (as much). Forex has times I don’t like trading, and so do stocks, but they are not necessarily the same times.

Learning a new market (even though I was profitable in another market) taught me that I should trade in a demo account until profitable with a strategy, and then start out slowly with real capital. Also, keep the initial deposit small, and then add more if things go well. Keep key elements that made you successful in the other market, even if the strategies are a bit different.

How I Implement New Day Trading Strategies Now

It is now 18 years since I started day trading. I have refined processes for just about everything imaginable related to trading.

If I develop a strategy, I historically test it by manually drawing the trades on historical charts and adding up profits and losses.

Then, if it is good, while I’m day trading my existing strategies I draw the new trades on my chart or note them on a notepad by my desk, continuing to track profits and losses manually.

If it goes well for a few weeks of live monitoring then I will start trading the strategy….at full position size. ASSUMING it is either stocks or forex which I trade regularly and have highly refined processes in. If it fails to perform, I cut back the position size drastically or go back to drawing it on the chart (no trades) until I figure out how to implement it better.

If I were to start trading a new market, then I would start out in a demo account until proven profitable, then in live trading I would start out with small position sizes and only grow the position size if results were good week after week.

Want tips like this to help you crush the forex market?
Check out the EURUSD Day Trading CourseIt covers everything you need to day trade the EURUSD in two hours or less, including strategies, routines, and mental-game work to get you into the profit zone.

Demo Swing Trading to Live Swing Trading

Swing trading is a little tougher to learn than day trading in my opinion. Not because the execution is harder, but because trades are more spread out and are more subject to overall market conditions. It takes more time to accumulate knowledge. I see five day trades play out over several hours. It often takes weeks or months to see five swing trades play out. The feedback on what we’re doing is much slower.

Here’s the quick process for transitioning to live swing trading:

  • Practice on historical charts by marking trades on a chart and tracking performance. Ideally, find 50 trades. This isn’t always an easy task if trading off a scan list. Just do the digging and find the trades. There aren’t any shortcuts.
  • Once you can see the strategy is profitable, trade it in a demo account for at least a couple of months. If profitable, note the overall market conditions, as this lets you know the conditions were good for the strategy. At least know you can trade in that environment…but it could change.

    You can have a strong or weak uptrend or downtrend, or choppy good or choppy bad (choppy can be rhythmic in a wide range (tradable) or erratic (not tradable…at least for me). Those are the basic conditions.

  • If feeling confident in understanding and implementing the strategy, transition to real trading.
    • Start out risking only 0.1% of the account per trade.
    • Only deposit part of your funds. Add more every couple of months if things continue to go well.
  • It takes most people a year or more to see different types of market conditions play out and to learn how to navigate them when swing trading (including staying out when conditions aren’t right for the strategy…nothing wrong with sitting on our hands).

Use your results as a guide. If you’re getting good returns then note the market conditions and keep pushing as long as those conditions persist (increase position size up to risking 1% or whatever level you have specified).

Reduce position size if conditions change or your results are poor, or stop trading if conditions develop that you know your strategy doesn’t perform well in. Resume trading real capital with a full position when conditions are good again; start with small positions if unsure of the conditions.

In my Stock Swing Trading Course, I lay out which conditions are good for the strategies, and when to avoid trading.

I discuss conditions more for swing trading because we are holding trades for days, weeks, or months, and most stocks move with the indices.

Major forex pairs all have the USD in common, so they may move similarly too (most of them ranging or trending at the same time) they just vary in the magnitude they’re moving.

With day trading we can have multiple conditions within a day; we often only have to wait a few minutes for good strategy conditions to arrive…and if they don’t we just don’t trade until they do. This is the same for swing trading, but the process plays out over weeks and months with swing trading, whereas it plays out over minutes and hours with day trading.

By Cory Mitchell, CMT

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