You know what a lemming is, those little rodents that follow their fellows off a cliff without knowing the wiser. Without questioning why they do this or that, without stopping to think that there may be a better way, a better decision, or action all together. Maybe a few of them thought about it for a fleeting moment and asked themselves why they are following the guy in front of them, but chances are the momentum of seeing all of their fellow rodents doing the same thing quickly squashed any hesitation that could have possibly saved them from a terrible decision.
So what does this have to do with trading, and more importantly, why are you a lemming? The easy answer is that most traders look for validation before they follow along – be it in listening to what other traders are doing, or looking at a chart and seeing a nice long trend line before they decide to follow. Those are all herd mentalities that lemmings are known for. So when it looks obvious to you on a chart, or you hear it from all over message boards, tweets, emails, financial news, or even at the water-cooler; you’re in the company of many when they are about to run off a cliff.
The not so obvious herd mentality started before you probably even knew what a trend line, MACD, or Bollinger Band was. Back when you started practicing on a demo account to get a good feel for trading since thats what you were supposed to start with right? Thats what you heard from others to begin with so it has to be right. Then once you got comfortable with your demo account you had to develop a strategy. So you probably listened to what other people did and maybe even found a great strategy that worked really well for the past 3 months (just like looking at a trend line that developed in the last 3 months), and then jumped right into live trading and quickly realized things didn’t look so good anymore.
For too long, people have thought that demo trading was perfect for preparing a trader for live trading. Though it may give you an understanding on how the platform works, it severely lacks in addressing the most important aspect of trading – your emotions. If you are not prepared for what you will feel when you are in a live trade and when you have adequate real money on the line, it will not matter if you demo traded for 5 minutes or 5 years – all of your rules are out the window.
But what about mini or micro trading that should work right? Have you ever played poker with potato chips and seen 5th street every single time? The same can be said when trading with such small sizes that the amount at risk is so small that it will have no emotional impact in your decisions. You’ll hold a position over night that you never would do otherwise; you’ll never place a stop, or move it enough where you don’t care about the real financial impact it would have if it were live money. You’ll do a host of things differently than you would do if you were up or down $500, $5,000, or $50,000 in a live trade since those mini or micro accounts simply do not provide you with an adequate environment to practice in. Now, you can put a lot more money in a mini or micro account to adjust for this, but then ask yourself. Am I trading now for real or practicing still? There needs to be a clear distinction. Most people would want to work out the kicks and test themselves without spending their bank account doing it so when they do hopefully figure out their trading plan, they have enough cash left to trade with.
Blindly following the status quo with demo or mini/micro accounts without knowing the risks that may lie just around the corner is bad for lemmings and bad for traders. So it would be fair to say that any trader trying to go from demo to live trading, just because everyone else does should also ask themselves why they are doing this in the first place.
If you want to learn what everyone else does not do, and still want to practice in live environment that not only allows you to master the platform, your trading plan, AND the emotional component checkout a reputed trading psychology software where you can address your emotional intelligence.