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Trading Education Posted by Team Topstep May 17, 2018

5 Ways to Know When You're Ready to Trade Live Capital



We recently discussed how sim trading is the secret to trading success. But you can’t stay in the virtual world forever — not if you hope to make money as a trader. So how can you know it’s time to start trading for real?

The key is consistency. In simulated trading, you get the practice you need to turn your actions into routine. The more your actions become routine, the better chance you have of responding to pressure in a positive way.
It’s a lot like what an elite athlete does. Take, for example, LeBron James hitting a last-second shot to win a playoff game. He makes the basket as easily as if he’s in his backyard.

You’re not working on your three pointer when you’re sim trading, but you are practicing the habits of a successful trader. Here are the five key habits you have to develop before you trade live capital.

1. You Have a Consistent Process

As a trader, your process is everything you do on any given trading day from the time you get up to the closing bell. That can include your:

  • Morning routine
  • Homework
  • Market assessment
  • Responses to the market’s state
  • Reflection

You want every element of your process to be consistent because it gives you a better chance of responding well to the pressure of the markets.

Let’s use James as an example again. Sure, he practiced taking three-pointers until they were second nature. But he follows a routine that prepares him for games, too. Every component of his routine triggers the appropriate actions. This is what you want your processes to do for you.

2. You Have a Consistent Strategy.

Be careful with how you interpret “consistent strategy.” No two days in the market look alike, so consistent doesn’t necessarily mean “always the same.” Instead, think of your strategy as something you can consistently apply. Essentially, that means you’ve identified patterns and have devised a plan that uses them to your advantage.

Additionally, you want to be confident in your plan. The more times you see your plan working in sim, the more confident you can be that it will work in the market. But remember, strategies are like hypotheses: you only want to stick with it until you’re proven wrong.

Bonus Tip: Are you keeping a trading journal? Make sure you track your routine, strategy, and your emotions so you can evaluate how they impact your trades.

3. You Are Consistently Profitable.

Before you try trading live, you want to know that you can make money — and not just for a few days. You want to see more money going into your account than out over time.

Why? Because sim trading is significantly easier than real trading. Most sim trading programs let you start over when you blow up an account. That gives you plenty of chances to learn, but it doesn’t give you any sense of what it’s like to make decisions when real money is on the line. If you aren’t profitable in sim, live trading will probably be even worse.

See how one funded trader achieved consistent profitability over time in this interview.

4. You Have Consistently Good Trading Metrics.

Traders can use a number of metrics to track evaluate their success. These may include:

  • Risk-to-reward ratio
  • Winning trade percentage
  • Average winning trade size
  • Consecutive winning days

Consistently good metrics are a sign that things are going well. You’ve not only developed a plan that works, but you’re following that plan more often than not. That’s a good sign you’re ready to stop sim trading.

Bonus tip: One or two weeks of decent metrics doesn’t tell you very much. Take a look at your stats over a longer period of time, like 30 days.

5. You Can Be Consistently Objective.

The market does not care about your opinions. It isn’t worried about what you think should happen. The market going to do what it’s going to do. Unfortunately, your brain doesn’t like that. It wants to dismiss information that proves it wrong.

That tendency is one of the reasons traders lose money. They simply can’t accept data when it goes against their plan. But traders who can remain objective in their sense of the market, who can even question what they think they know, often come out ahead.

If you’ve found yourself frustrated with the market when it doesn’t do what it’s supposed to — and you’re metrics are still good, then you are ready to go live.