What To Expect When You're Expecting Identical Performance: Sim Trading vs. Live TradingPreface Harouna Traoré opened a small account at Valbury Capital, a brokerage firm based in the United Kingdom, in the summer of 2018, after using a simulated trading account as a retail trader in Paris, France. A few weeks later, he was testing his strategies while trading at home on what he believed to be the sim version. He had purchased more than one billion dollars of US and European securities and was down more than a million dollars. He continued adding to his positions, and his total exposure was eventually over five billion dollars. The market rallied in his direction, and he locked in a profit of slightly less than twelve million dollars. Exactly when reality set in on Harouna is unclear. Valbury had given him a live trading account accidentally. This was no simulation. The positions were real, and so were the initial losses and the final profit. The $12 million was more than Valbury’s revenue for the entire year. Harouna wanted to share in the profit from the trade, while Valbury challenged that Traoré breached his trading limits and refused to pay him. For the purposes of this article, the outcome is unimportant but nonetheless, a fascinating story. Harouna wasn’t a great trader. He didn’t have an “edge” in the market and wasn’t a great analyst with some brilliant thesis. He was lucky and trading without consequence. If you are going to attempt a real career in trading or asset management, you need to take your simulated trading seriously and with the same seriousness as actual funds. By working with a funded trader program like Score Priority Try2BeFunded offering, the outcome of your demo trading can result in a funded account and launch your trading career. Simulated vs. Live Trading In almost all asset classes, you can test your strategies using a simulated account in the hopes of earning a funded one. For the purposes of this article, we are just going to focus on US equities trading, similar to the program at Score Priority Prop. Sim and Live trading in equities have lots of differences. Here are just four major ones: 1. Accountability for All Decisions In life, all of the decisions you make have consequences. In trading, you are taught to analyse any potential risks and potential rewards before you open a trade. When the trade is closed, the consequence of that trade is the profit or loss. Simple. There are no do-overs or make ups. Almost every demo trader, at some point, immediately regrets the decision of sending an order to open a position. Real traders are forced to live with their decisions while most demo traders can reset their program and pretend like the trades never happened. Trade the demo as if it were live funds. You are only deceiving yourself if you don’t. 2. Price Action When you execute a live trade, there are two main order types: market orders and limit orders. A market order is a buy or sell order to be executed immediately at the current market prices. As long as there are willing sellers and buyers, market orders are filled. Market orders are used when certainty of execution is a priority over the price of execution. A market order is the simplest of the order types. A limit order is an order to buy or sell a stock at a specific price or better. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. A limit order is not guaranteed to execute. A simulated trade is different. The software that you are using has a set of rules to determine at what price your simulated trade will be executed. Sometimes the trade is executed at the last available print on time and sales. It can also be marked to the bid, offer, or the midpoint (the mean of the bid and offer). When you decide which service or platform you are going to train on, this is a critical question. Depending on the frequency of your trading, these small discrepancies can make a major difference in the performance of the count. The most realistic prices for market orders would be a fill at the offer on buy orders and a fill at the bid on sell orders. 3. Liquidity and Market Impact When you first start trading, almost all of your orders should be round lots of 100 shares. As you get more experienced, you will look to trade larger sizes (i.e. 1,000 lots, 10,000 lots etc.), or scaling your positions. An example of scaling would involve buying shares as the price decreases. To scale in means to set a fixed price and then add to the position as the stock falls below that price. Buying will continue until the price stops falling or the intended trade size is reached. In live trading, the liquidity available in your security is extremely important. Let’s say that the bid/offer is .10 (10) by .15 (5) (1000 shares bid at .10 and 500 shares offered at .15) in a stock you’d like to buy aggressively and you want 1,000 shares. You place a limit order to buy 1,000 shares at .15, but there are only 500 available. You execute an order for 500 shares at .15, but you have 500 more to buy. You now become the bid a .15, and the quote is now .15 (5) by .20 (25). If you want to buy the second 500 shares now, you will have to pay .20 or place a limit order at a lower price and hope that someone will sell you their shares. This is an example of how important the liquidity in your security is. Because of limited liquidity, you are forced to pay a higher price for the shares you want, and in this example, you actually impacted the market and changed the price quote because of your order. How will your simulator react in the same situation? This is an important question. Will they allow you to execute as many shares as you want at the current offer price (not very realistic) or only execute up to the offer size? How many times will you be able to execute the offer size (can you place 10 orders of 500 share to buy .15)? The way your simulator reacts will make a big difference in your ultimate performance and how confident you will be in your trading record when you do trade live or funded. 4. Emotion Controlling your emotions and understanding the psychology of traders is the most important thing when making the transition from simulated to live trading. Most traders rush to open a live account after a short period of simulated trading and a few successful trades. The allure of quick and easy money is strong, but a few successful trades in a sim account does not a trader make. Trading with a live account creates some strong emotions in neophyte traders, like fear and greed. Fear and greed cause newbies to react completely differently and sometimes irrationally when they trade live. The best and most seasoned traders will sometimes get emotional. What they have that you probably don’t is the confidence that their system works if executed properly. You must master your trading system through simulated trading for at least three to six months. In that time, you probably will have seen strong up and down trading sessions, an earnings season or two, and how macro-economic and political news can affect prices. This should give you the confidence to enter the market properly and hopefully make good decisions. Remember, there is a fine line between confidence and arrogance. Know the difference. Summation When preparing for a career in trading and portfolio management, you need the best tools and information while you are learning the ropes. While trading on a simulator will not make you wealthy, it will somewhat prepare you for the trials and tribulations that you will encounter in the marketplace. If you understand the difference between a live and simulated trading experience, you will be prepared to take the next step in your career. Good luck, Your Trusted Source of Information at Score Priority Toll-Free + 1-855-274-4934