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Is demo trading the right approach before ‘real trading’ and if so at what point do we move off demo trading?

Apr 29 • Between the lines • 2060 Views • No Comments

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shutterstock_94154542There are many extremely useful free tools our brokers offer us that are often under-used, misused, or simply ignored and the demo account is one such free offering. It’s under-used as many traders are far too impatient to move onto real trading and as a consequence use the demo for a short period to then impatiently move onto real trading. It’s misused as many traders fail to recognise the true value of demo accounts if used properly; therefore they simply abuse the accounts thinking (incorrectly) that it doesn’t matter as “it’s not real money”. And lastly it’s simply ignored as an option with many traders completely failing to recognise the many subtle and not too obvious values demo accounts and demo trading can have over and above the obvious destination of having somewhere to practice trading.

Trading with a demo account helps traders familiarize themselves with the brokers’ platforms

If you’re new to trading then the overall complexity of this business can be absolutely overwhelming at times. It’s very easy to reminisce and think back (from a position of success and experience) that all the skills we required in order to trade successfully came easily too us. However, the reality is that the learning process was stretched out over a long period of time. We’ve probably forgotten many of the basic mistakes we made and this is before we even discuss familiarizing ourselves with a totally new platform.

Even if we’re experienced traders, considering moving our accounts from our present broker to a new broker, we should still consider using the demo version of the real platforms before trading with real funds. When you’ve become very familiar with a particular trader’s platform it can still take some time to acclimatize to a new platform and some of the early basic mistakes we could make could be quite costly if we fail to learn how a new platform’s intricacies work. There is so much to learn, from the execution of orders and the basic administrative skills, to the overall layout and ‘feel’ of the new platform.

Testing strategies out over a long period and running test strategies whilst trading live

If we’re a new trader, or a successful and experienced trader wishing to test out new strategies, then the demo platforms can prove to be invaluable as once we’re live we can still use our demo trading platform effectively. Many traders will have a restlessness and intellectual curiosity were trading is concerned and will therefore be constantly on the search for micro improvements and adjustments to their current strategy. Or be looking to see if an entirely different trading method may work versus the one they’re currently using. For example, we may be a scalper testing out the feasibility of running a trend trading technique alongside our scalping method, or we may be a successful swing trader looking to see if a micro adjustment to where we place our orders; entries, take profit limit orders and stops, would have any real impact on our bottom line. In either scenario demo accounts can prove to be invaluable.

Only go live once we have a serious track record of profitability in our demo account over weeks or months, don’t be impatient

Trading on demo doesn’t really prepare us for the emotional side of trading as no matter how seriously we take our demo trading and how respectful we are towards it, at the back of our minds we instinctively know that no ‘money is on the line’. Whilst we can still imitate the exact trading methods that we employ on demo in the ‘real trading world’ and take satisfaction from doing the job correctly, by following our trading plan in demo mode exactly, nothing can really prepare us for the emotional exposure real trading delivers. Quite frankly the emotional challenges FX and other trading delivers are unique and hard to replicate in any other profession. Also we need to keep in mind that even when we do ‘go live’, the emotions that we experience between when trading a $25 account and a $25k account will be entirely different. Therefore it’s often advisable to take baby steps into the world of real trading after demo and trade micro/mini lots versus full lots initially.

Keeping it real, not staying in ‘demo-land’ too long

Ultimately with demo trading we’re trading in a highly synthetic market that may not act as the real market. And no matter how our broker sets up the demo account to match and mirror that of the real trading environment the likelihood is that the demo account won’t act like the normal account. Moreover, our behaviour and attitude towards the demo account will not mimic how we act in reality. Whilst we know that it’s painless when we have losses on demo trading platforms, nothing teaches us a a lesson faster than losing some cash and in some ways the quicker we step up to that situation the better, but only if we’re 100% certain in our trading strategy and trading plan.

Try to make the demo account imitate our reality

When we open our demo account we’ll be given certain options with regards to the trading amount we can use, generally ranging from 10K to 100K. There is very little point in selecting a 50K trading amount if we’re only going to trade with 10K once we’re ready to go live. We should use the demo account to replicate as much as the real time trading we envisage making as possible. In that way we’ll be making only one step to real trading, trading with real cash. This transition will be that much easier given that we only have one aspect to concentrate on fully.

Making a profit on the demo does not guarantee the same profits with a real account

The market doesn’t care that we’ve successfully and profitably back tested our strategy back for three years on demo, or that we’ve forward tested in ‘live’ conditions our trading strategy for six weeks or months and deduced that its profitable and workable. Once we’re live and trading with real funds (however modest initially) the market can change and commit a sudden handbrake turn completely destabilizing both ourselves and our trading plan. In short, as many of us seasoned pros will testify to, nothing is guaranteed in this business other than the unexpected. Testing out our beliefs through our demo accounts will without a doubt make us a more rounded and professional trader, it won’t guarantee success, however, treated and used correctly demo accounts can prove to be an invaluable tool in the armoury of free tools on offer from our broker.

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