Section I: Where to go from here
In this section, we will review some steps you need to take before you start risking real money trading your system.
The first step is to test your system on a demo account. Most Forex brokers offer a demo account (virtual money). This is an excellent choice to test your trading system as there is no money at risk. In this step, you will figure out if the strategy works for you. If you feel comfortable trading it, then it is more likely to produce good results. How much time should you stay in this step? It varies, it depends on the frequency of your trading signals, but you should not go one step further until your system gets consistently profitable results over a significant sample of trades. It can take many months, but you need to be patient. If you don't get consistent results, it is suggested to go back and review your strategy because it is not likely to achieve consistent results in your real account either.
You must be honest with yourself; you need to take every single signal generated by your system, not only the signals you thought were going to work, otherwise, you are going to have problems in the next two steps.
Ok, by now you had consistent profitable results on your demo account. You might think it’s time to go full. Nope, nope, nope. There is a big difference between trading a demo and a real account. The most important difference lies on emotions (fear, greed, anger, etc.) These are psychological barriers that affect every single decision made by traders in real accounts regardless of what he/she is trading (stocks, bonds, Forex, futures, grains, etc.) These emotional factors, in my opinion, are the most determinant factor that separates profitable traders from the others.
The next step is designed to deal with emotions and to confirm the results obtained in the prior step (consistent results in a demo account.) In this step you need to trade a real account with limited funds. Some brokers offer fractional lot trading. Meaning you are able to trade any desired amount (even cents), other brokers allow you to trade mini-accounts. What is important here is that these emotions we’ve been talking about are present only when there is real money at risk. At this stage, you are going to see if you are really comfortable trading your system.
If you are able to produce similar results than those obtained in a demo account, then you are ready for the next step. If you don’t, then you might need to tweak your system or create another one, as there is a chance your system will never fit you. If you created consistent profitable results on this stage, you have a chance to produce similar results in the next one; on the other hand, if you didn’t produce good results in this stage, you will not be able to make consistent profits on the next stage. Remember, you need to do things right, and be honest with yourself.
The last stage is trading in a real account with sufficient funds. If you are at this stage, and have passed successfully steps one and two, go ahead and try it, you need to be confident in yourself and in your system, your strategy must have already produced consistent profitable results, these are reasons to believe you are going to make it. Very few traders fail at this stage (if passed successfully prior stages.)
Remember the only way to test and actually being able to trade a trading system consistently is if you understand the following two points:
1. Market Uncertainty: Every single moment in the market is unique, there are only similar patterns (not identical patterns), the outcome of any pattern is unknown. However, we don't need to know what is going to happen next in order to make money; we only need to take the trades our system signals, in the long run the probabilities will play in our favor.
2. Trust and Commit to Your System: You have created your system, you know it has an edge, whenever it signals a trade there is a higher probability that the market goes in the intended direction, the only work you have to do is to follow it. Take ALL signals (nothing less) generated by your system; it is the only way you are going to gain confidence. And believe me, confidence is a very important component when it comes to trading successfully. If you went through every step in the process to test your system and finally got to the last one, then you should be confident about your system, it has produced good results, if you follow it consistently, it is likely to produce good results in your trading account with sufficient funds.