Trading is an exciting experience, but not when you lose a considerable amount. No wonder profit and losses are a non-negotiable part of trading, but success can only be achieved when your profits are higher than your losses. To make sure that they have gained sufficient skills and enough knowledge, traders practice on a demo account before putting their real money in line.
However, the results achieved on demo accounts may not always be the best determinant of a trader’s performance, as there are many differences between trading on a demo account and trading on a live account. Here, in this article, we are going to learn about those differences and try to understand how you build skills and confidence by practising on the demo account.
Differences Between Demo and Live Trading Accounts
The results obtained on a simulator account may not always translate seamlessly to real-life trading scenarios. The biggest reason for this is the absence of real money on a demo account. Since trading on a demo account is accomplished by using virtual funds, it may give a false sense of security to a trader. The absence of tangible risk that comes with real money on the stake can create an unrealistically positive trading environment for a trader.
Consequently, a trader may develop bad habits like not following their trading plan, overtrading, making impulsive decisions and not evaluating the risks before entering a trade. However, when they switch to trade in live trading, this same behaviour can be disastrous. This is because trading with real funds triggers a completely different psychological mindset. A trader starts to feel anxious, greedy or all sorts of things which can lead him to costly mistakes.
Psychological Factors Affecting Trading Performance
The chasm between simulated and live trading is perhaps most jarring when it comes to the psychological impact of trading with real money. Broadly speaking, there are three most impactful emotions, which can significantly affect one’s performance on a live account: Fear, Greed and Hope.
The fear of losing trading capital can be the biggest deterrent for forex traders, preventing them from implementing their trading strategy. In the same way, greed or hope makes a trader believe that the losing position can be profitable and the market can turn in their favour. This mindset never lets a trader make an informed decision as they keep holding the position when they should have exited it.
Most of the time, traders ignore or easily forget about the losses made on a demo account, but losing money on a demo account has a material impact on the trader’s life which can not be ignored. The psychological toll of losing real funds is far greater than losing virtual funds on a demo account. This is what makes the transition from a demo account to a live trading account most difficult.
Differences in Market Conditions Between Demo and Live Trading
There are profound differences in the trading conditions on a demo and live accounts. This is why what looks like a seamless trade on a demo account may be a far cry from what would happen in the live market. To make it more clear, while a demo account provides seamless trade execution, the live trading is often riddled with issues. For instance, you may never come across a situation in a demo account when the broker requotes the prices, but it frequently occurs on a live account.
If you are practising on the MT4 or MT5 trading platform, then you will find your broker executing orders at the exact price that is displayed on the screen, whereas in live trading, slippages occur at times, which makes it difficult to execute trades at a price you’ve placed your order at. Especially when you place a large order, these are split into smaller chunks, each executed at a different price. As such, demo accounts also tend to fill in early fills. But that’s not all! Stop loss orders may also not execute perfectly on a live account due to slippage. Entries and exits are highly subjective, and results achieved in a demo account are, at best, a mere approximation and, at worst, a completely misleading one.
The Importance of Monitoring and Analysing Trading Results
If you want to be a professional trader and make some serious profit, you should know that analysing your trading results is one of the most important parts of trading, no matter if you are trading on a demo account or a live account. Analysing is not just about keeping track of your profits or losses, but it’s about delving deeper into the details, as it can help you gain the most valuable insights.
You should monitor various aspects like the percentage of your winning trades, pairs that have performed well for your strategy, time frames that have served you well, pip value and most importantly, your psychological state while trading. There is a lack of emotional impact on a demo account, but if you want to prepare yourself for live trading, you should treat your demo account as real and try to simulate the experience of winning or losing money on a demo account. Regular monitoring and analysing give you an opportunity to identify the best and worst trades allowing you to identify your mistakes and techniques that worked well. You can apply this knowledge and understanding on a live account to get the best results.
The Value of Using Demo Accounts for Practice and Skill-building
Beginners are often intimidated by the fast pace of the forex market, but a demo account gives them a chance to take things slowly without taking any financial risk. It can be said that a demo account is the most powerful tool for any trader, be it a beginner or a seasoned trader. While novices can use a demo account to test their skills, experienced traders can use it for backtesting and fine-tuning their strategy. Traders can learn different aspects like risk management, chart analysis and order placement while practising on a demo account and can gradually build their skills. However, a demo account should be treated with the same level of seriousness as a live account. Even though the money in the account is fake, the emotions and reactions should be very real. You should feel the pain of a loss and the excitement of a win.
The Risks and Benefits of Transitioning From Demo to Live to Trade
Demo trading has its positives and negatives that you should be well aware of in order to make the right use of this useful tool.
A Forex demo account is the perfect sandbox for beginners to test the waters without putting their own funds at stake. Providing a simulated trading environment that mirrors the actual market offers an excellent opportunity to learn the ins and outs of forex trading. Traders can also test their trading strategies in a live market environment without taking on any real risk. While beginners can practise on any platform, most beginners prefer the MT4 platform due to its user-friendly UI and enough features to learn the concepts of trading. They can easily monitor their strategies under different market conditions and make adjustments accordingly. It’s like having a virtual laboratory where traders can experiment with different theories and approaches to trading.
Overall, a demo account is great for those who are just starting out and want to familiarise themselves with the platform before taking the plunge. However, a demo account does not truly reflect one’s trading abilities and skills. Since the stakes are not real in the demo account, the sense of risk and rewards is also not the same. On a demo account, traders largely rely on intuition to make trades and focus solely on accumulating profits. They do not care about money management. However, it’s not a sustainable approach while trading live, which is why demo trading, when not done with proper intention, can prove risky.
Trading with your own funds is a whole different experience. Even if you exhibit exceptional trading prowess on a demo account, you may not be able to survive in the live market. However, by treating a demo account as real, you can make the best out of it and hone your skills. Just make sure you don’t spend too much time on a demo account, as you may develop bad trading habits over time, making switching to a live account difficult.