I read this article and totally agree. I thought it provide some unique insight that would be beneficial. It was written by Trader V I found it on ForexFactory.com. I do not know his real name. The post is in his words.
________________________________________
I posted this in another thread and many thought it was valuable information and I believe the correct place for it is here in the beginner’s area where it will be read by those who will hopefully benefit from the words within.
I mentioned that it is possible to trade with a $500.00 account and be profitable and in fact build upon that.
So I want to touch on a couple of points one is my feelings on demo Vs real accounts and the other is how a small real account should really be looked at.
There is debate about the use of demo accounts to learn how to trade. Some say you should never trade a real account until you become profitable with a demo. Others will say demos are worthless just open a real account and be done with it.
Well I am a middle of the road kind of guy here.
Let me explain:
I do believe that there is value in using a demo account. But I believe that people do not understand how they should use the demo account. So many people start a demo account with 10K, 30K 50K or even 100K. Let me say this. If you are going to trade a demo account with $50,000.00 then you damn well better be prepared to open a real account with the same amount.
Now why would I say that?
For the simple reason that new traders will open an demo account with 50K and then trade it like it was 100K using leverage they never should have been using and placing trades that would make Jack Schwager cringe. They make a couple of lucky trades and think man this is great if I keep this up I can quit my day job in 6 months.
Whooo hold on there partner. This is when they go and open a real account with 200 500 or even 1000 dollars and trade the same exact way. Over leveraged and over exposed. In 2 weeks to 2 months they have blown there account and either get frustrated and throw in the towel or they go looking for the Holy Grail and purchase the hottest trading system on the market that has a 97% accuracy.
They go back open a demo account and repeat the same process over and over again until they are either fed up and just quit the trading game all together or they are lucky enough to find folks like Feb and James16 who are willing to show them the truth about the markets and bring new traders back down to reality.
So I say yes open a demo account but open it with the same starting capital you are looking to open your real account with. And treat it like it was real money using proper Money Management and proper leverage.
So now let me share my thoughts about real accounts. Many folks come to the table with a small trading account and pie in the sky dreams. Please do not get me wrong I encourage you and everyone to dream as big as you can. But just understand you must have a realistic outlook and know that with a small trading account you can still get to those big dreams it’s just going to take a little longer as you build your account.
I have seen many times where a new trader opens an account with $500 and even have a trading plan and sound money management strategies. But where they fall short is they treat the 500 like it is nothing rather than treating like it is their golden key to freedom.
You see they place trades with proper risk, and when a trade goes against them their discipline falls to the wayside with the thinking that the trade will come back in my direction it has to. Then they start to say well it’s only $10 dollars then the 10 turns into 20 and so on and so on. You see what is happening here. They discount the amount of money that is in the market and treat it as no big deal!
The opposite is also true. I have seen traders come to the table with the same money skills and plan and the only difference is they have the discipline to stick to their plan. But because the returns are in small amounts of dollars and cents like a $5.00 wining trade or a $25.00 winning trade or even a $1.50 winning trade they start to treat trading as more of a hobby then a business then they either lose interest and hope or start making bad trading decisions because they feel they are not getting where they are going fast enough.
Here is my remedy for folks with small accounts. Treat it like it is your GOLDEN KEY to FREEDOM. Because it is. Next forget about the dollars and cents until the end of every month. I don’t care how much the trade is worth in actual dollars all I know is I need to end the month with more positive pips then negative pips.
Then at the end of the month review your account balance. If your 500 account has grown to 518 you need to do the math and understand that you made a 3.6% return on your account. Is this huge? You bet your sweet bananas it is. And as your account grows the size of your trades will grow and before you know it you will have a sizable account to trade from for a living. Now this is not to say that you cannot continue to add to your account as you progress to help it grow faster in fact I encourage this once you have gained the experience to pull profits out of the market consistently.
Now taking the previous example let’s assume you only ever make a 3.6% gain on your account and never have a better month or improve your trading skills. At the end of 1 year of trading with a $500 account and making a consistent 3.6% you will have grown your account to $737.78 which is a 47.5% return after a year!!! Go find me a mutual fund hat has that kind of performance. So forget about the dollars and cents and do the math and understand the real effects of what your trading is doing.
Below is what that same account would do after years. I hope you enjoyed this post and were able to take something out of it.
Balance Return
$500.00 $18.00
$518.00 $18.65
$536.65 $19.32
$555.97 $20.01
$575.98 $20.74
$596.72 $21.48
$618.20 $22.26
$640.45 $23.06
$663.51 $23.89
$687.40 $24.75
$712.14 $25.64
$737.78 $26.56
$764.34 $27.52
$791.86 $28.51
$820.36 $29.53
$849.90 $30.60
$880.49 $31.70
$912.19 $32.84
$945.03 $34.02
$979.05 $35.25
$1,014.30 $36.51
$1,050.81 $37.83
$1,088.64 $39.19
$1,127.83 $40.60