How to Use a Trading Simulator to Help Psychology

Understand how to use trading simulators for improving skills and managing emotions. They offer a risk-free environment for better decision-making.

Using a simulator can help you avoid developing emotional reactions, like moving stop losses or revenge trading, that are often created in live markets. It’s also useful for collecting data, testing strategies, and refining skills in a risk-free environment, making it a great tool for both new and experienced traders.

What Is a Trading Simulator?

Trading simulators have become popular in recent years. They gained their popularity as you can practice your trading while skipping the boring bits to find opportunities quicker.

So, what is a trading simulator and should you use one?

A trading simulator is usually a type of software you can download and practice your trading using real historical market data. What separates it from a demo account is the main selling point, the ability to speed up and slow down time and start at any point in time. Want to trade through the 2008 financial crisis? You can with a simulator.

There are many different ones out there, but they should all include some key features:

Being able to download historical data so you can choose when and what time frames you want to use.
A timer setting to slow down or speed up time in the simulator, including a pause and rewind button. That gives you more time to analyse situations when needed and speed up to avoid wasting time.

How a Simulator Helps for Psychology

I am firmly on the side of using a trading simulator. Why?

Neuroscientists suggest that our brains perceive financial threats similarly to physical ones. As a result, novice traders may experience a form of trauma when their emotional processing becomes overwhelmed by losses or unexpected gains. These experiences often lead to conditioned responses, causing traders to react unconsciously and automatically to specific triggers.

These issues may not appear significant in the initial learning phase but can later sabotage your trading performance, such as:

Moving your stop loss unnecessarily
Closing profitable trades prematurely
Indulging in revenge trading

These psychological obstacles often originate in the live markets. A trading simulator offers a safe space to develop your skills and gather implicit knowledge without the risk of developing trauma-induced responses. More seasoned traders can also use simulators to collect data and try various market situations without the need to trade in real-time. It offers a chance to create and test strategies, leading to more adaptive and effective decision-making.

Furthermore, a simulator makes it much easier to collect lots of data, ensuring we aren't misled by small sample sizes. It negates the common fallacy where traders mistake temporary profitable results as evidence of a profitable system. Most importantly, a trading simulator is a tool that is available 24/7, 365 days a year, allowing you to refine your skills whatever time you have available.

If you’re thinking about using a simulator, we created an entire guide to using one, including the benefits, drawbacks, and a range of different practices to improve your trading.

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