This is a question that I got from one of my subscribers, so I'll answer it here.

Paper trading is a good exercise for beginners, but you don't want to be stuck doing it for too long…or stop before you're ready.

So let's take a look at how to find the right length of time to paper trade.

Traders should paper trade until they can meet or exceed their monthly percentage return goal, averaged over a 4 month period. For example, if a trader has the goal to make 2% per month, then the trader should make at least 8% profit, over a period of 4 consecutive months. Traders that are using a longer-term swing or position trading strategy should consider paper trading for 6 months to a year because there will be much fewer trades. 

Now let's take a closer look at what paper trading is, how get started, and how to set goals.

What is Paper Trading?

Paper trading is when a trader takes simulated trades, with the goal of learning how to become a consistently profitable trader.

Before computers were widely used, traders would write down their simulated trades on paper, thus giving it the name “paper trading.”

Now many brokers in the stock, options, futures and Forex markets offer online paper trading accounts.

They are also known as demo accounts.

These accounts allow traders to execute trades as if they were trading with real money.

The website keeps track of the trades and the trader can see the profit/loss from each trade.

This makes it easy to test strategies and learn the mechanics of placing trades, without risking real money.

Set a Paper Trading Goal

The first step in effective paper trading is to set a goal. If you don't have a goal, you won't know when you should stop paper trading. 

Some traders say that you shouldn't have a goal, because that will affect your trading psychology.

I disagree.

Not having a trading goal is like saying a Formula 1 driver shouldn't have a target lap time.

…or a competitive weightlifter shouldn't measure how much they are lifting.

You need to have a target.

Yes, it's true that you won't hit that exact target all of the time, and you shouldn't get too wrapped up in hitting that target every month.

But you should have a good idea of the average return of your trading strategy. 

So the next question becomes: What should your first goal be?

There are many legitimate ways to answer that question, but I feel that you should start small and build from there.

Pick a small number like 1% a month, 3% a quarter or 12% a year.

If you can average 1% a month consistently, you can probably make more by adding more trading strategies, timeframes or markets. If you can't hit that small number however, then it's impossible to every earn more.

Define Your Strategy

Next, write down your exact trading strategy and prove that it has an edge.

You can prove this by jumping right into paper trading with play money, but a better way is to backtest it to see how it would have worked in the past.

I've created a simple trading plan worksheet here. Print that worksheet, fill it out, and you'll have a complete trading plan.

You can also use a simple Google Doc, Evernote…or whatever works best for you.

The key is to write it down and follow the rules every time you take a trade. Keep your trading plan next to your computer, or open it on your computer before trading. 

Once you have a trading plan, now it's time to open a paper trading account.

How to Open a Forex Paper Trading Account

In order to open a paper trading account in Forex, simply go to the website of the broker that you'll be trading real money with, and open a demo account.

When you visit a broker's website, there should be a link to open a demo account.

Follow the instructions on how to setup the trading platform and start paper trading. The process of opening an account usually only takes a few minutes.

From there, it will take some time to setup the trading software. Brokers will use trading software like MetaTrader, TradingView, or have their own proprietary platform.

This will also give you the opportunity to master the trading software and test out the broker's customer service team.

Most brokers will allow you to adjust the amount of money in your demo account, so you can trade with numbers that are realistic to your situation. If you want to have a demo account that doesn't expire, consider using Oanda.

To see a list of Forex brokers that I recommend starting a demo account with, go here.

How to Open a Stock Paper Trading Account

There are different paper trading platforms for stock trading available, but a good one to start with is Thinkorswim by TD Ameritrade. They offer a paperMoney account that will allow you to demo trade stocks.

I've found the Thinkorswim platform easy to use, and it's great for both new and experienced traders.

Is Paper Trading Accurate?

It depends on which market you're paper trading. 

In my opinion, Forex is the best market to paper trade. Almost all brokers offer a demo account, where you can simulate live market conditions. 

Since Forex is so liquid, a demo account is a very good approximation of how you will do in a real-money account. So I consider Forex the most accurate market to paper trade in.

Paper trading in other markets like stocks, options and futures, can be less realistic because certain stocks or contract months can have low liquidity. When there's low liquidity, you are much more likely to see slippage in a live account, or not be able to get your trades executed at all.

Therefore, paper trading in stocks, options and futures can be less accurate. But you should still do it because it's a great tool for learning how to trade. 

How Do I Know When I'm Ready For Live Trading?

Once you can hit your paper trading target, now it's time to make a decision if you want to jump into real-money trading or not. Only you can make the call on when you should start risking real money.

One thing to consider is your personality type.

There are 2 ends of the personality spectrum to consider before stepping up to live trading:

1. Are you someone who tends to be very impatient? If yes, then you should probably paper trade for a couple extra months to be sure that you are ready.
2. Are you someone who tends to over-think things and always wants to get “more information?” If yes, then you should probably jump into a small live account as soon as you can hit your target average monthly return over 4 months. Otherwise, it can be easy to get stuck in the cycle of trying to learn more.
3. If you're in the middle of the spectrum, then be honest with yourself and ask if you're truly ready to start risking real money.

These are only general guidelines, based on what I've seen over my 13+ years of trading experience, and talking to traders from all over the world.

Do what you feel is right for you. 

Conclusion

The amount of paper trading time that's required to master a trading strategy will vary greatly by trader.

We all have very unique personalities and there's no one-size-fits-all formula for how long you should paper trade. 

However, if you follow the guidelines above, you will get to a point when you will know that you're ready to stop paper trading, and start trading real money.

When you feel like you're ready to risk real money, start with a small account. There may be unforeseen psychological challenges that you may have to get used to.

Also read my Forward Testing Guide for more tips on how to do effective paper trading.

Finally, believe in yourself and that you will know when the time is right for you to stop paper trading. Take control of your personal power and don't give it away to someone else by blindly following what they tell you. 

Let your data and common sense show you the way. 

The post How Long Should I Paper Trade? appeared first on Trading Heroes.

Do you play fantasy sports? Maybe you have participated in an office pool or played with some friends.

I play fantasy (American) football every year with some friends and I came in second in my league this past season.

It is a fun diversion and it makes watching the games even more interesting.

Of course, trading players led me to think of the correlations between Forex trading and fantasy sports.

Although they are not directly related, I believe that there is an element to fantasy sports that can give you huge leverage in helping you achieve your full potential as a currency trader.

Here’s what I mean…

How Fantasy Sports Can Help Traders

You will never get Lionel Messi, Christiano Ronoldo, Gareth Bale and Neymar Jr. on the same team in real life. No team has that much money.

But what if?

This is what makes fantasy sports so much fun.

We have the opportunity to manage a team of players that we think would win the championship, without annoying restrictions like salary caps, owners, complex contracts or player egos.

Now what would happen if we did something similar in trading? But instead of trading fantasy players, we traded Forex with the same disregard for many of the constraints of your normal trading.

At this point, you are probably thinking that this sounds a lot like the free demo account that you can get from any Forex broker.

It’s not.

I call it a Side Testing trading account. 

Who a Side Testing (ST) Account is For

A Side Testing account is an account that you open to answer these two questions:

• What would my performance look like if I took the trades I decided to pass on?
• What would my performance look like if I took the trades I missed?

So a ST account is for traders who:

• Feel that they are being too indecisive.
• Feel that they are missing out on a lot of profitable trades.

If you fall into one, or both of these categories, keep reading because here's how a Side Testing account can help you.

Benefits of a Side Testing Account

The bottom line is that a ST account will allow you to see:

• If you are talking yourself out of good trades.
• If you are missing good trades and more importantly, how to fix that.

Let's break these down individually….

Talking Yourself Out of Good Trades

No matter how much you test a trading system, trading it with real money can be a totally different ballgame. You might second guess your entry every time you see a potential setup. This is especially true if your setup is more on the discretionary end of the spectrum.

So a ST account gives you the freedom to take a trade that looks good, even if you would have passed on it in your primary account. When you add the results from your ST account to the results in your live account, you can track if the trades you are passing on would have improved your profitability.

We often beat ourselves up about the trades that we didn't take and worked out, but we tend to forget about the trades that we passed on that ended up being losers. Keeping these trades in a separate account allows you to get a totally objective look at your results.

…without putting your primary account at risk.

Missing Profitable Trades

Another thing that a ST account will help you figure out is what your trading results would look like if you were able to take all of the trade setups that you missed.

You might miss trades because:

• You were sleeping
• You didn't check the charts that day because you were too tired from work
• You had technical difficulties like a bad internet connection or a computer malfunction
• You had to work

Obviously, you cannot avoid some of these scenarios. However, tracking your missed trades will allow you possibly figure out ways around them. For example, maybe you can automate part of your trading or you can put backups in place so you are prepared for unforeseen events.

Another realization that you may come to is that you have to find another trading strategy or change your trading timeframe because your current strategy doesn't work with your lifestyle.

You might also be beating yourself up over your current trading results, when in reality, you are simply missing a few trades that would make you much more profitable. This realization can be a huge psychological boost and give you the confidence to keep trading.

Now that you know how a ST account can help improve your trading, let's get into how to actually setup an account.

Side Testing Account Requirements

There is really just one requirement that needs to be fulfilled before opening a ST account.

You will only open a ST account if you have a trading method that has been tested and has passed a backtest and/or forward test. If you do not have a strategy that has positive expectancy in testing, then a ST account is useless.

Go back to testing and find a strategy that works. Once you have that, you can now move on to opening your Fantasy account.

Choosing a Broker

I personally believe that your ST account should be a live account with real money. You need to simulate some of the the psychology of trading real money and a demo account will not do that. Ultimately, this is your call, but this is what I recommend.

However, it does not have to be a normal sized account. You can use a small account at a broker that allows nano lots.

Obviously, small is relative to your current situation. It could be as little as $100 or as big as $1,000. Using nano lots allows you to take the optimal amount of risk on each trade, even with such a small account.

Your account should also be at your current broker, if possible. Then you won't have to flip back and forth between different brokers. The less friction there is in the process, the more likely you are to do it.

Many brokers allow you to open a sub-account without submitting additional paperwork.

Take advantage of this.

Trading in Your Side Testing Account

Since there are are both real-time and hindsight elements to a ST account, placing trades will take a little more work than with a regular live account, but it's worth it. Here's what you have to do to make it work.

Position Sizing in Your Account

One thing that you should not change in your ST account is the amount of risk on each trade. For example, if you have figured out your optimal risk with this guide, then take that same amount of risk in your account.

For example, I risk 0.7% per trade on a trending outside bar setup.

So I would take the same amount of risk in my ST account.

Journaling Your Trades

The key to an effective ST account is your trading journal.

In this case, a simple spreadsheet is the best way that I have found to keep track of your trades.

Log both your real-time and hindsight trades on the spreadsheet.

It doesn't have to be fancy, it can simply have the following:

• Open date
• Currency pair
• Open price
• Stop loss
• Take profit
• Percentage risk
• Close date
• Close price
• Percentage profit/loss

Analyzing the Results

Then add up your results at the end of the month and see how much better or worse your results would have been if you had taken those trades in your primary account.

Remember to calculate everything in your ST account in terms of percentage profit or loss. This way you can roughly tell how much your ST trades would add or subtract to your trading.

Keep it simple and you can get all of the benefits, without much additional work. 

Other Benefits of a Side Testing Account

But that's not all!

There are a couple more potential side-benefits of a ST account.

When you are taking every single trade that you see and you even get to “trade” the trades that you missed, it acts like a “release valve” that can reduce the pressure to take every single trade in your primary account.

A second benefit is that you might start to see further optimizations that could increase your returns. You have to be very selective when trading your primary account.

…and for good reason. To give yourself the best shot at being profitable at the end of the month, you need to only take premium setups.

But using a ST account gets you involved in more trades. When you look at more trades, you will get more practice, which will ultimately make you a better trader. 

Conclusion

A Side Testing account is not for everyone.

However, it you are struggling with indecision and/or missing trades, this technique can help you gain more confidence in your decisions and figure out how to stop missing profitable opportunities.

This just one of the ways that you can address your trading weaknesses.

The post Forex Side-Testing Account: How to Leverage Fantasy Sports Dynamics appeared first on Trading Heroes.

Backtesting your Forex trading strategies is great, but it is only half of the story. If you haven't read our Forex backtesting guide for manual backtesting, then do that before you move on with this guide.

You need to know how your trading system would have performed in the past, before you test it in the present. 

But once you have a system that is profitable in backtesting, it's time to move on to forward testing. In this post, I'll give you our Forex forex testing guide. I'll show you why you need to do it, how to do it effectively and what to watch out for.

Alright, let's get those forward testing gears turning…

In this post, I will give you a step-by-step process for setting up your first forward test. I will also answer common questions that traders have about Forex forward testing.

Step 1: Understand Why You Need This Forex Forward Testing Guide

Backtesting is great, but you need forward testing too.

You see, there are things in backtesting that cannot be predicted in live trading conditions. These are things like:

• You might be sleeping when most good setups happen
• There might be differences between your backtesting charts and your live charts
• The spread and swap might be different enough that it impacts your profitability
• You might trade differently when real money is on the line

So for all these reasons (and a few more that I missed), you need to test your trading system in as close to real trading conditions as possible.

Step 2: What You Need Before You Test

You cannot just jump into forward testing directly. There are three very important things that you need first.

1. The first thing that you need is a rule-based trading method. If you don't have one, then here are some courses that I recommend.
2. Next, you need to have tested that system on the currency pair and timeframe that you want to trade it on. For example, if you want to trade it on the EURUSD daily chart, then be sure that you have backtested it at least three times.
3. If the backtest was profitable over the entire backtesting period and you were happy with the results, then you are ready for forward testing.

Do not proceed until you have these three things. Once you have them, it's time to move on to step 3.

Step 3: Setup a Demo or Live Account

Now it's time for the big decision, live account or demo?

Most people will go for a live account.

But is that the right thing to do?

I say…yes and no.

You see, most responsible trading educators will tell you to start with a demo account because it is the CYA (cover your ass) thing to say.

…and they really might think that it is beneficial. They are entitled to that opinion, I'm not saying that they are wrong, because some traders will do just fine with a demo account.

But I would generally disagree with staring with a demo account. I think you are better off starting with a really small live account.

Here's why…

Trading is all about psychology. It's not about the system (contrary to what you may think right now).

…and the psychology of a real account (even a very small one) is much, much different from the psychology of a demo account. If you haven't experienced this yet, you would be surprised how different they are.

Even if you only have $1 on the line, it is a huge psychological difference, compared to having $0 on the line. 

So, for most people, I would recommend setting up a live account with no more than $100 at a broker that allows you to trade nano lots, like Oanda.

The reason is:

Even with a tiny account like this, you can still take the proper risk, while still getting the feeling of risking real money. I would recommend starting off with 0.25% risk on each trade.

The only time that I would recommend starting with a demo account is if $100 is a significant amount of money for you, or if you cannot get access to a broker that allows you to trade nano lots. 

Remember, you are not trading to make money right now. Because you probably won't.

The goal of this is to not lose a lot of money, while you are learning to trade your system well.

Step 4: Track Your Results

Now that you have decided on a demo or live account, it is time to track your results. You could use a spreadsheet, but there are better solutions, so you should use them.

The more time you spend messing with a manual spreadsheet, means less time spent on testing and analyzing your trades.

Just use an automated tracking system like MyFxBook to track your trades. It's easy and free, so there is no reason that you shouldn't use it.

That said, remember that you should also journal your trades.

You can use an online journal, a manual notebook or even a video journal. Find out what works best for you and use that.

Remember, the imperfect journal you actually use is better than the perfect journal you don't use. So just get started with the easiest thing and don't overthink it.

You can always upgrade later.  

Step 5: Start Trading

Once you have everything setup, this is where the rubber meets the road.

Trade your system and follow the rules, just like you did in backtesting.

Not much more to it than that.

I would say to do about 100 trades in forward testing, before you start to change things. But you can adjust that number as you see fit.

If you are trading on longer timeframes, that might not be realistic. So use your judgement as to when to stop testing an reviewing your results.

When in doubt, test more than you think is necessary. 

Step 6: Review Your Results and Look For Improvements

Once you have about 100 trades, it is time look at your results in MyFxBook and see if that match your backtesting results. Obviously, they won't match exactly.

But if the results are way off, then you have to figure out what is wrong.

Here are some possible reasons that your results could be different:

• You are not available during the times that your best trades setup
• You only backtested during a period when your system worked really well
• You didn't backtest over a long enough period of time
• Something in current market conditions has changed
• You aren't following the same rules in forward testing, that you used in backtesting
• You are using a different amount of risk
• You could be in a normal drawdown in forward testing, making the results look really bad, but is otherwise normal

These are not the only reasons, but you get the idea. It's up to you to examine the results and figure out if they are valid or not.

Final Thoughts on Forex Forward Testing

That is how you get started in Forex forward testing. It is a vital step in the trading process, so don't skip it.

Most beginning traders will put all of their risk capital into a live account and trade it with no system.

…and that is why most people blow out their accounts within the first few months.

Be different and give yourself the best shot at success. 

Frequently Asked Questions

Do I Really Need to Forward Test?

Short answer: Yes. 

Long answer:

• Would you ride a motorcycle on the freeway without being able to drive in the parking lot first?
• Would you skydive solo, on your first jump…with no instructions?
• Would you do brain surgery on your mom, before going to medical school?
• Would you go shark diving without a cage?

You get the point.

Forward testing means trading in real market conditions.

You need to walk before you can run.

Should I Forward Test in a Demo or Live Account?

You will hear different opinions on this. The safe answer is to tell you to get started in a demo account, so you don't lose any money.

But this isn't always the most beneficial way to do it. 

When you trade in a demo account, the trading psychology is very different between a live and a demo account. You will be surprised how much you will stress a trade, when there is as little as $1 at risk. 

If you trade in a demo account, you might find that you also lose interest quickly.

I do.

I believe that you will learn much faster and stay engaged in the process if you trade in a very small live account and use nano lots.

Therefore, I recommend opening a $100 account at a broker like Oanda and risking only 1% per trade, or less.

Your goal is not to make money. The goal of this exercise is to learn how to trade well. 

Make sure you hear me, because a lot of people put all of their money at risk from the start.

Start with a very small account. If you cannot do this, then you don't trade at all because you will lose all your money! 

Can I Skip Backtesting and Go Straight to Forward Testing?

Yes you can. But it will take longer.

Much longer.

Backtesting gives you a good idea of if a trading strategy will work or not. Once you have a system that would have worked well in the past, it is time to test it in current market conditions.

Without any knowledge of historical performance, you are walking through the testing process. Backtesting puts you in a Porsche.

I'm sure you understand this intellectually, but this video will drive the point home.

How Long Should I Forward Test?

This really depends on your trading system and your personality.

If you are trading a longer timeframe system, you will probably have forward test for a longer period of time because you will have fewer trades.

But if you really need a rule of thumb, I would say to trade for at least 100 trades. Even then, you have to be super comfortable with the system. If you aren't, then keep forward testing.

My friend Walter Peters says that you should be able to triple your demo account before you ever trade real money.

But only you can determine when it is time for you to trade will your entire risk capital. 

Still Have Questions About This Forex Forward Testing Guide?

Leave a comment below and let us know if you still have questions about the process…

The post The Beginner’s Forex Forward Testing Guide appeared first on Trading Heroes.