Lesson 3. Creating Your Own Trading System

No one likes preparatory work as many people prefer to instantly get down to business and act according to the situation. It is contraindicated for traders to do this if they do not want to lose their savings in the blink of an eye. In the third lesson, you will learn how important and useful it is to improve your trading skills using a demo account. After all, wouldn't it be better if you learned to swim in the pool, rather than immediately diving into the depths of the ocean?

You can refine your trading strategies with a demo account and you won't have to risk actual money. When choosing a trading platform, always ensure that it provides a simulator, and this will certainly help to prevent unnecessary losses. Over time, you will develop your own trading style based on your strengths. After gaining experience, you will also choose the instruments that suit you best.

Lesson Topics:

1. Creating a demo account
2. Developing and testing trading strategies
3. Finding an individual trading style
4. Pattern recognition

Trading on a Demo Account

Binary options trading is a very time-consuming and complex type of activity. Novice investors sometimes underestimate the cognitive and emotional difficulties they are going to face. It is not enough just to have theoretical knowledge to survive on the stock exchange. It is likely that it will become very costly to start trading with no practical experience. This is because markets don't work exactly the way you think they do.

A demo account makes it easier to enter the world of trading and allows you to save a lot of money. Since you are trading in simulator mode and do not risk real money, you have the opportunity to try out your strategies in action. Regardless of the individual transaction results or mistakes during trial trading, you do not lose anything. Alternatively, you will only gain valuable knowledge.

We strongly recommend using a trading platform with a built-in simulator, where you can practice your trading skills under real market conditions. For example, Pocket Option allows you to try yourself with unlimited virtual balance absolutely free of charge. Once you get used to this platform, you can easily switch to trading with real money.

The threshold for entering binary options trading is very low, which allows you to quickly open a trading account and, consequently, instantly gain access to the market. Therefore, inexperienced traders should be careful. You should deal with your greed and resist the temptation to immediately start trading with real money. You'll lose your capital sooner or later without practice and strategy, even if you are lucky at first.

Benefits of Paper Trading

Paper trading means trading without real money on a demo account. This expression appeared at a time when investors did not have the Internet and each action had to be recorded on a piece of paper. The term “paper trading” has been in use to the present day, but a trader today does not need to manually describe every transaction made as it is enough to make only a few mouse clicks.

Trading on a demo account allows you to test all possible strategies, markets and trading instruments. There is also a game component, because you have the luxury of being creative and not having to worry about losing real money. Feel free to try anything that comes to your mind. You're going to get more insight into your strengths and weaknesses by unleashing your imagination.

You will be surprised how many experienced traders resort to paper trading. Professionals constantly improve their strategies and practice trading skills on demo accounts in order to develop the most profitable action plan.

Each trading strategy goes through two stages of testing before using:

• Backtesting: How successful would the strategy have been in the past?
• Real-time testing: Does the strategy bring profit in real market conditions?

Paper trading provides rich learning opportunities. You can:

• Test different trading instruments and indicators at different time periods;
• Practice implementing any trading ideas and plans;
• Try different entry and exit points considering real market conditions.

The main advantages of paper trading:

• You will feel the dynamics and volatility of the market;
• You will learn about your strengths and weaknesses;
• You will understand which trading style and assets are the most suitable for you;
• You will choose the perfect trading day schedule for yourself.

This list can be continued even further. If you train under highly realistic conditions, then paper trading will bring you a number of benefits. It means that you need to carefully plan transactions and keep statistics. You should act as you would act while trading with real funds. This approach will allow you to continuously improve your skills.

You will need discipline and perseverance, but believe me, the efforts invested will pay off. When you find your trading style and understand the best way to use your strengths, you will have the psychological prerequisites for successful trading with real money.

You will be surprised how difficult it is to implement a trading strategy on a demo account and stick to it for at least a few weeks. This will give you a sense of the importance of preparation prior to real trading.

Is Paper Trading Efficient if I Am Not Risking Anything?

The main feature of paper trading is also often called its main disadvantage as it has no risks. Many traders lack motivation or patience to trade in demo mode for the following reasons:

It does not give real emotions. The investor does not risk anything.

• Trading mistakes have no outcomes. At any time, you can reset the virtual account and start again.
• In simulators, you can trade huge amounts. In real trading, a large leverage is not available to the majority of novice traders.

Indeed, you are unlikely to show emotions in the simulator, which may make it seem that you are acting unrealistically. It is good, because the main purpose of trading on a demo account is to determine the psychotype of a trader. By doing this, you will be able to find your trading style and niche. Equally
important is the fact that you will have the opportunity to implement strategies until you master them perfectly.

By repeating certain processes, you turn them into a routine and develop automatic behaviors, which you can then resort to even under severe emotional stress conditions. Rehearsed and effortless processes give you self-confidence and a sense of security in emergency situations, when feelings can prevent you from acting rationally.

Many neuroscientific studies outline the benefits of paper trading. As you already know from the first lesson, constant training consolidates and strengthens neural connections.

Before getting access to control a real plane, novice pilots spend hundreds of hours in the simulator. They work out various processes and procedures in order to be able to automatically repeat them in emergency situations under great time pressure. Therefore, you will develop the ability to act and make decisions under any circumstances. Similarly, traders can improve their skills using a demo account.

Pattern Recognition

One of the most important skills in trading is pattern recognition. The ability to see recurring patterns in financial markets is a real art. It allows you to gain a statistical advantage through considering the increased probability of price events for which your strategy was created. By recognizing these events in your trading practice, you increase your trading profitability in the long run.

Recognition of Explicit Patterns: Technical Analysis

When it comes to patterns, most traders imply repetitive graphical patterns, fundamental correlations and price movements in the market. This could also include the calendar, seasonal and other statistically verifiable patterns.

In our other course, you could already get acquainted with the “Triangle”, “Flag”, “Rectangle” and other popular graphical patterns for binary options. These models can become the basis of a profitable strategy.

Technical analysis is a popular method of analyzing the price movements using charts to identify current trends. Prospective entry and exit points can be determined based on support and resistance levels, momentum, volatility and other data. It is assumed that obvious patterns previously observed in the
market will be repeated and traders develop relevant trading strategies hoping for it.

Pattern recognition also involves the ability to recognize your own patterns of thinking, feeling, and behavior. When you systematically analyze the profitability of your transactions, you will get valuable information about your own trading style. Answer the following questions:

• Which positions are more profitable for you to work with, small or big ones?
• When do you trade more successfully: in volatile markets or during stable trend periods?
• Do you prefer long or short setups?
• Do you follow trends (impulse trading) or go against them (opposite trading)?
• Is there a linkage between your emotional state and profitability?

Get used to observing yourself and recording all the patterns you notice. Based on the subsequent analysis, you will be able to refine your setups and strategies. In the following lessons, you will learn how to detect and overcome problematic psychological patterns.

Recognition of Implicit Patterns: the “Sixth Sense”

The explicit patterns are obvious and understandable to every trader, although it takes at least several months studying technical analysis to learn how to quickly recognize them and select the appropriate trading strategies.

Recognizing implicit patterns is a completely different matter. They can’t be seen with a naked eye or comprehended by the mind. The intuitive ability to recognize hidden patterns is based on knowledge that is stored deep in the subconscious mind and can only be gained through experience and repetition.

Research has shown that experienced traders are naturally able to see complex patterns in certain market situations, but they are not able to explain how they are recognised. This has nothing to do with extrasensory perception and other non-scientific fields of knowledge. The fact is that they perceive even the slightest changes on a subconscious level, which is another sign that the human mind is a machine for pattern recognition. It continuously processes incoming information by checking it for patterns and intuitively comparing with previous experience.

When a pattern is detected, the brain automatically compares it to patterns already stored in it. The neural circuits are strengthened when coincidences are detected. If the pattern is new, then information about it will be stored in memory for later use in case of its repetition. Physical reactions, for example an increase of heart rate, act as somatic markers indicating that the brain has discovered a pattern.

It is easier for the brain to recognize known patterns than to detect and store new ones. In other words, it is much more difficult to identify a pattern that we have not encountered before. Perhaps this explains the difficulties that even experienced traders face during a radical change in market conditions.

Professional investors note that they often rely on their intuition. It is a type of subconscious intelligence, caused by repeated repetition of similar patterns. Intuition is beyond ordinary sensory perception.

The ability is the result of many years of experience and well-developed observation. If you are distracted or unable to focus, then this special talent is not available to you. Good intuition requires mindfulness, hence success in trading largely depends on your ability to achieve emotional balance.

Summary

Demo account is a free account in a trading platform that allows you to trade with virtual funds.

Paper trading is the practice of simulating trading that allows you to practice without risks.

Personality psychotype is a set of character traits that is decisive in its usual behavior and reaction to stimuli.

Technical analysis is a set of tools for forecasting based on price change patterns from the past in similar conditions.

Impulse trading is the practice of buying and selling assets in accordance with the recent strength of price trends.

Opposite trading is a game against the market (when stocks rise, you trade against them).

Somatic marker is the projection of emotional experience in judgments and decision-making.