Why trading with a Demo Account is Not The Same Our Thoughts.

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Nearly every binary options broker on the market has started offering their traders the opportunity to trade on their platform without using real money. And normally we are all behind that idea. It’s a great chance to earn some experience and feel less nervous about being out the and trade in the real world.

But very often trading too long on your demo account can be just as harmful as it was useful in the beginning. Why is that? Simply because trading using a demo account for longer that it is needed makes you develop poor trading habits and decreases your chances to succeed when you switch to the real money account.

Here are the top 3 reason for that:

1. Losing on a demo account doesn’t feel as painful as losing real money.

It might sound harsh, but sometimes to lose money is a positive thing for a newbie trader. It shows you that you are always vulnerable when trading on the markets. Of course, we are not suggesting blowing away all your money! But having some losses on your account occasionally remind you that markets are tough and you should always be cautious.

2. You are trading larger amounts of money on a demo than on your regular account.

When trading in a simulated environment, traders tend to bet larger amounts than they are able to in real life. Supposedly, it will make trading large amounts in your real money account easier for you. But the truth is that even if you have good money management strategies and are a careful trader, trading too much on a demo will make it tempting to chase your first big loss with a larger trade than you can perform.

3. You are more prone to overtrade on a demo account.

Demo accounts often tend to resemble real world trading but at reduced spreads. On a demo, a trader can be profitable at a .5 pip spread. But try that with real money you get eaten alive with a similar strategy at a 1.3 pip spread. Thus, demo makes overtrading easy, especially for the novice traders.

Making The Best Out Of Your Demo Account.

But should you avoid demo accounts altogether? No, not at all! Demo trading is a great way to practice for a while. But don’t get carried away! Trading for a long time without any risk attached to it is pointless. Eventually, you need to switch to the real money account. Even with a small amount of money (or even just a minimum deposit), you will experience trading from the whole new perspective.

Frankly, this is because some amount of risk is a trader’s friend. It keeps you focused and present. This isn’t by any means something new, but sometimes we need to be reminded of it.

So make sure you’re using your trading demo account during a reasonable amount of time, and then let it go and trade with real money. Because that’s when the real fun begins!

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Are Demo Accounts An Indicator of Investing Skills?

Demo accounts are advertised all over the internet, and people who surf financial sites are often exposed to many ads inducing them to open a demo account. Demo account trading is the new form of paper trading. The old-fashioned paper trade involved writing down entries and exits to see how a methodology played out in the market.

Demo accounts allow the trader to do this on a computerized simulator. The simulated trading environment does provide a trader with the opportunity to get used to the software they will be using with their broker to trade the markets, but when a person moves to live trading after the demo account, there are several shocks they need to prepare for.

Why the Shock?

Many traders trade profitably in a demo account, but when they move to live trading with their own money, a succession of losses may occur one after the other. Why does this happen?

  1. Demo accounts provide better execution than live trading.Demo accounts will normally fill a market order at the price showing on the screen. When an order is placed in the live market, it is subject to slippage, and therefore it is quite common for market orders to not be filled at the price expected, or in the case of large orders, for at least a portion of the position to be acquired at a different price than is expected.
    Demo accounts will also generally give early fills when bidding or offering. Bids and offers in the live market are also subject to a queue. Bidding at the current bid price does not guarantee a fill, as only a few shares or contracts may be filled at that price. In a demo account, it is hard to know which orders would actually have been executed in the live market. This is true of entries and exits, and thus results attained from a demo account are highly subjective at best, and completely inaccurate at worst.
  2. Demo accounts often provide more capital than what the trader will actually be using for live trading.Demo software generally allows the trader to choose the amount of capital they would like to simulate trading with. The amounts vary, but are often very large and beyond the actual capital the trader has for trading their own account.
    Simulated trading with more capital than will actually be traded provides an unrealistic safety net. More capital allows for small losses to be more easily recouped, while a loss on a smaller account is harder to recoup. It is also important to note that even-share lots (100 shares) in more expensive instruments, which were easy to afford in the high-capital demo account, may be beyond the capacity of the trader in a live account. The instruments and volume traded in the simulator may not be able to be replicated with real capital. A trader may be able to trade several lots of Alphabet Inc. at $1,000 a share, but unless they have similar capital for live trading, they may be unable to trade those higher-priced instruments at all.
  3. A demo account cannot simulate the emotions of fear and hope (or greed) that the trader will experience with real money.This is one of the most jarring differences between simulated and live trading. Fear of losing one’s own capital can wreak havoc on a proven trading system and prevent the trader from implementing it properly. Greed (or hoping a losing position will come back to profitability) can have the same effect, keeping the trader in a trade long after it should have been exited.
    When real money is on the line, money that can have a potential material impact (or is perceived to have a potential impact), it is far different from trading a demo account where success or failure has no material impact on the person’s life.

Can Demo Trading Be More Realistic?

Demo trading does have some benefits, as it gives new traders a general idea of how the market and a company’s software works. So, can you trade a demo account in a certain way to make it more realistic? While a demo account can never offer the same results that would be realized in live trading, there are several things you can do when testing out systems on a demo platform to make the results as realistic as possible.

  1. Make Realistic Assumptions:If a bid or offer is placed, and you can see that the bid or offer was within one tick or one cent of the low or high of that move, assume that your order was not filled. The demo may show this order was filled, but in the actual market, this may not happen. Remove the profits or losses from these trades from the net profit/loss shown on the simulator—as if the trade never existed. Only assume bids or offers are filled if price trades through the bid or offer by at least a cent more. For thinly traded stocks or low-volume stocks this buffer should be expanded.
  2. Account for Slippage:On market orders assume at least a one-cent slippage on high volume stocks, and assume larger slippage in lower volume or more volatile stocks.
  3. Trade With Modest Capital:If possible, trade the same amount of capital in the demo account as will be traded in the live market. If the demo does not allow this, trade only a fraction of the demo account capital. Don’t access any funds from the demo capital which would be in excess of live trading funds.
  4. Get Personal:Pretend the money is real as much as possible. Monitor emotions and how trades are affecting you psychologically while those emotions are felt. Since demo capital provides no real loss or profits, the sense of loss or profit needs to be added in by the trader. One method of doing this is to withhold something you enjoy if you fail to follow your trading plan, or give yourself a small reward when the trading plan is followed (regardless of profit or loss).

The Bottom Line

Demo accounts can provide some benefit to new traders, as they allow the trader to become familiar with trading software and get a sense of how the market works. The problem is that simulated results rarely correlate to actual trading results. Therefore, the trader must be aware that execution, capital, and emotions can be different when trading real money as opposed to fake money. Traders can, however, make demos more realistic by excluding profits/losses on orders that are unlikely to have been filled in the real market, factoring in slippage, keeping the demo account capital in line with what will actually be traded and making demo losses and profits (and thus emotions) real by incorporating external stimulus.

Demo Trading VS Live Trading – What You Have To Know

Demo Trading VS Live Trading – What You Have To Know

One of the most commonly asked questions new traders have is how long they should stay on demo trading and what to do when they demo trade. My view on demo trading stands in contrast to what you usually read about demo trading on most other websites, but I am a strong believer that if you want to make it in this business, you can’t listen to the common advice. 99% of all traders read the same stuff, get the same advice and follow the same path – and they all end up losing money. It’s time to think differently and approach trading from a different perspective, at least that’s how I did it and it has worked for me.

Extra: Here is how you install MetaTrader4, one of the most popular trading platforms.

No question, demo first!

No doubt, every trader should start on demo first and he should stay on demo trading for at least the first 2-3 months. The biggest mistake I see people make is that they can’t make the transition from demo to live trading and they are stuck with their demo trading WAY too long. Staying on demo too long will ruin your way of trading as we will see later.

Purpose of demo trading

When it comes to demo trading, you have to ask yourself what your goals are with demo trading and what you want to achieve so that you can objectively judge when you reached those goals and can move on to live trading. There are 3 main things that demo trading is for:

1) Understand the platform

Especially for new traders, it is important that you get to know your trading platform very intimately. You should try every button and test every feature of your platform. Thinking about how to use your platform while you are making live trades is a clear sign that you transitioned too fast.

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2) Order dynamics

Depending on the market you trade, you have to make sure that you understand the different order types and also how to execute your trades. Demo is the ideal place for that because your actions don’t have any consequences.

Try to understand what the difference between a market and a pending order is. How does a stop vs. a limit order work. How can you place stop loss and take profit orders for your trades and what happens when price reaches those orders?

Just try out all different order types and observe what happens. You’ll very quickly understand what the different orders do and it’s surprising how many people don’t do this simple step.

3) Get a feel for market dynamics

Especially if you are a new trader, this part is key to avoid large losses and unnecessary trading mistakes. During your 3 months on demo trading, pay close attention to market dynamics, how price moves and note down everything that catches your attention.

Here is my checklist for things to look for when getting to know price and market dynamics:

  • When does price move the fastest and when doesn’t it move?
  • How do price movements differ across different markets, forex pairs, timeframes?
  • Which timeframe works best for your daily schedule?
  • How do news impact price movements? Which news are the biggest movers?
  • What type of price behavior do you feel most comfortable with?
  • Do you see lots of gaps and how can you deal with them?
  • Are you OK with overnight positions?

What demo trading can’t do

It’s so important to understand the limitations of demo trading and what demo trading can’t do for you and what you should not expect from it. The majority of traders will, however, look at the points below and still try to make them work with their demo trading – big mistake.


1) Validating your system

This is probably the cardinal sin of demo trading, yet so many do it. You can’t validate your trading method and the profitability of your trading strategy on a demo account. It does not matter how good your results are on a demo account, they mean NOTHING when you change to a live trading account.

Demo trading is like riding a bike with training wheels on; you won’t crash and hurt yourself too much but once you take the training wheels off you are not going to be a good cyclist.

As I said above, demo trading should only be used to get to know your platform, the way you execute orders and how price dynamics work; it can’t be used to confirm your method.

You might build a little confidence and also understand how to execute your trades within the scope of your trading method, but good demo results never translate to good live trading results.

2) Preparing you for live trading

Demo and live trading are two very different things and from a pure trading perspective they have nothing to do with each other. Once you have some live trading experience under your belt, you’ll know that the greatest challenges a trader faces are NOT related to following price and identifying a trade, but they are purely emotional nature and only exists because of the money involved. Here a short checklist of the things demo trading can’t prepare you for:

  • The discipline of waiting for days for the right moment to enter a trade
  • Dealing with the pressure once you are in a trade and the uncertainty
  • The emotions that make you stay in a loss longer and let you cut profits too early
  • FOMO and entering too early because you want to make more money
  • Not wanting to lose money and passing on valid trading opportunities
  • Being too greedy on the exit and not closing your profitable trade

Many traders will argue thatВ you just have to treat your demo trading as if it was real money to get the best results. The problem with that is that it’s not possible. You will ALWAYS know that it’s just demo trading – you can’t fool yourself that easily.

The greatest danger of demo trading

The biggest problem traders who stay on demo too long have is that their undisciplined trading behavior becomes a part of their general approach to trading. A trader who isn’t punished for his bad behavior and who doesn’t feel the pain is more likely to adopt a sloppy and unprofessional attitude and once he transitions to live trading, he will inevitably lose his money.

You won’t hear this too often but staying on demo too long actually does more harm than good.

How to transition from demo to live

Now that you know what to do and expect in demo trading, here are some tips that will help you make a smooth transition from demo to live trading:

1) Start small

You’ll inevitably lose your first (few) trading account(s) so it’s important that you trade with money you can afford to lose.

At the same time, you HAVE TO MAKE SURE that the money you are losing is worth it. This means that you know WHY you are losing and what you can do to stop it. Losing money without learning your lessons is a waste of your money and your time and it will keep you in this loop for a very long time ever.

2) Protect your emotional capital

We said it already, but it’s so important that you really get this point: you’ll inevitably lose money the first year(s), but protecting your emotional capital is even more important. A trader who loses his motivation, the fun and the excitement for trading becomes overly negative and frustrated is very likely to give up on trading completely.

Make sure that you understand your motives, don’t set yourself unrealistic expectations and don’t be too hard on yourself. Enjoy the process.

3) Don’t focus on the money

You are not going to make money so it’s important that you focus on the right things during your early stages as a trader. Your top priorities should be developing discipline, trust in your rules and your system, building a strong trading routine and developing a passion for trading.

Those things, along with a strong and conservative money management approach, will make sure that you lay a solid foundation at the beginning which you then can leverage later on.

What are your thoughts about demo trading? What is holding you back and what are your greatest challenges and worries? Let us know in the comments below and we’re happy to help out where we can.

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