Today we’re going to delve into a pretty commonly asked question I get from new traders: “When should I switch to live trading”? It’s not always the most clear cut and easy answer as it depends heavily on where you’re at in your journey to becoming a professional trader.

For some traders they actually dive right into live trading from the start to get their feet wet with exposing themselves to the discomfort of putting actual money on the line. For others the shock of risking real money is overwhelming and puts a damper on their ability to learn how to trade.

So what do I recommend? It boils down to your personality type, but I highly recommend starting out with demo trading before you even think about funding a small personal account, or even going near prop firm challenges.

Assessing When To Switch To Live Trading

This first thing I suggest you do is start by finding a trading strategy, going through it, taking notes, and analyzing historical chart data in hindsight to reverse engineer price action. 

Simulation Trading/Backtesting Your Strategy

The next step would be to give it a test in a simulation environment where you can’t actually see what happens. This will give you a more realistic idea of how to execute trades as price action develops in front of you. I highly recommend a tool like FX-Replay or Tradingview’s built-in bar replay tool for this. Note that sim trading/backtesting can be a great tool for learning, but don’t fall into the trap of rushing through your testing.

Demo Trading To Test Your Strategy In Real-Time

The next and probably most important step would be to practice your strategy in a demo account. The reason this is important is because it gives you a real-time environment to practice your trading strategy without time dilation. You can’t just skip to the next day, you’re sitting there in the present moment waiting for a setup, and entering, and managing it in real time without the ability to skip ahead to see what happens.

Testing The Waters With A Live Account

Once you’ve proven some profitability on these two fronts and have collected some benchmark data, and you’re confident in your strategy/the execution of it (doing roughly 3-6 months of demo), then it’s probably a good time to switch to a small live account and see if you can perform the same with real money on the line.

This is the point where it’s important to be on the ball about tracking your trades, journaling, and keeping self-aware as there are some pretty major psychological differences between demo and live trading for most traders. This is the stage where it’s important to assess your mental preparedness and see how you react to taking wins and losses with real money. 

Start Small and Prioritize Managing Your Risk

Before going the route of buying challenge accounts from prop firms like 99% of traders do, I actually recommend opening a live trading account with a trustworthy broker that has a trading platform you’re familiar and comfortable with and funding it with enough money that you’re okay with losing, but makes you at least a bit uncomfortable, otherwise it’s no different from demo trading. Something has to be on the line so you can start exposing yourself to these new emotions.

Setting Strict Risk Parameters and Sticking To Them

This is usually the point where most traders will encounter challenges related to impulse and self control. It’s not that every trader has this problem, but a good chunk of traders will break risk rules in order to make losses back, but only to their detriment.

It’s important that you stay vigilant and stop yourself from engaging in these habits early on, otherwise it’s easy to fall into the trap of gambling and exposing yourself to way too much risk. Respect your daily trade limits, stop-loss, and take your profits where your strategy says to take your profits.

Gradual Position Sizing

Another thing you can do to ease into trading with live funds is to start with half the risk you’re used to trading with. This gives you some leg room and margin for making mistakes and errors. It also can lessen some of the psychological stress you might experience as a trader who is afraid of losing money. Trading is not about diving head first into things. It’s about taking small baby steps and building your skills up.

Track and Review Your Live Performance

As I mentioned before, keeping a trading journal and keeping track of your trades, trading decisions, and emotions are extremely important habits you need to develop in the demo trading stage of things. 

Make sure you review your trades daily (after the trading session ideally) when it’s still fresh in your mind. This will help you identify deficiencies in your trading, and more importantly patterns in your trading that you can choose to build upon if you’re making money with a particular setup, or dial back on if it’s causing you to lose money.

Self-Awareness and Identifying Mistakes

Lastly, be sure to note any emotional reactions you’re having so you maintain self awareness and are able to manage or diffuse them before they turn into impulses that manifest as reckless trading decisions. Easier said than done, but it starts with awareness. Sometimes these deficiencies can be very subtle and hard to cut as habits once they’ve formed. 

Adapt and Scale Risk Gradually

Once you’ve proven a track record of profitability using your small live trading account, now is the time to start gradually increasing your position size as consistency improves. I recommend adjusting risk up in increments so as not to shock yourself too much in the event of a losing streak, where you might draw down more than you’re used to.

This is also where I’d say you can start looking at the different prop firms if you really want to go that route. Though I’m not a huge fan of prop firms, the benefit is that they can provide access to a large amount of capital with much less risk, at the cost of being somewhat more psychologically challenging to trade because of their various limitations and rules.

In Conclusion

Transitioning to live trading can seem like a pretty overwhelming step for someone trying to start up their trading career, but it’s a very necessary step for engaging with the market and getting comfortable with being uncomfortable. For some it may come naturally, but for others they’ll need to build up slowly so they can build their confidence up as traders and make a real career out of trading in the long term.

That’s it for today!

-Brian