Demo Trading

I love cheese … and chalk has its place too. But they are as different to each other as … well, chalk and cheese!

It’s the same with trading your account in a live situation with your own money on the line, as opposed to demo trading an account supplied by the broker with as much ‘play money’ as you like. They are totally totally different beasts.

Most online forex and trading brokers offer the Demo Account to aspiring traders in the hope that, as most traders lose their accounts, that they can tempt you into losing your money with them. Many years ago traders would practice by entering their trades by writing it all down on paper rather than actually entering the trade in a live situation, thus the term ‘paper trading’ was born. My own views on ‘Demo trading’ are made abundantly clear all over the Black Dog program but it does not hurt to pen it down in one easy-to-read article.

Why use a Demo Account in the first place?

This feature allows you to trade the markets with no actual money at risk thus granting the opportunity to get to know how the market moves, any ‘money’ used is in fact virtual money that the broker offers to you in their ads. “Free $100,000 Demo account.” Who can refuse that? On the other hand, the trader may not have funds available at the present time but needs to get to know the details of how to use the trading platform before he can fund his account. This, as far as I can work out, is the only benefit of a demo account as it most certainly does not benefit the potential trader when he comes to use a ‘live’ account in any other way as we shall shortly see.demoaccount1

Maybe the trader needs the demo account to test a strategy before he starts funding his live account? Maybe so. I test my strategy every day by making demo trades – all I do is to use the Price Label tool and place that at the entry level when I receive a signal and let the strategy do the rest. I don’t need a demo account to do that. When do I use the demo? When I’m not actually 100% certain that the conditions are just right to use real money. As the chart rolls by I can see if these entries were good or not so. I can then adjust my thinking and my strategy.

Traders should, and must, have a trading plan. The problem is that when in demo trading mode most of those rules go out of the window allowing bad habits to creep in and be reinforced. There is no doubt that results obtained from demo trading and those from live trading vary considerably.

A successful demo trader may not succeed during live trading. Failure at demo trading may not necessarily mean failure with a live account. It all depends on the person as an individual. I can categorically state that trading is a very emotional game when real money is involved. Playing with virtual money will not prepare you in any way for the battles ahead. Lose $1000 of virtual money and it is no problem. Lose just $10 of your own money and it’s a different ball game. Place the same trade at the same entry point – one with your demo account at $100 per pip, and one with your live account at only a penny per pip. I know which one you would be watching like a hawk.

Would demo trading really help you to get to know yourself as a trader? I seriously doubt it.

What other things can affect my ability to trade using a demo account?

The broker himself.

1. Are you receiving the actual platform that the broker offers to ‘live’ clients?

2. Slippage. Demo market orders, stop orders, buy orders etc may be executed accurately. Not so with a live account.

3. Demo prices are often much different from the actual trading prices.

4. Requotes occur frequently during live trading – not so with demo trading.

The trader himself.

1. Bad habits from failure to follow the Trading Plan.

2. Lack of emotion.

3. Overtrading.

Again, this is my view only, but I think that a demo account is the worst thing a trader can do whilst learning the ‘ultimate game’ with a view to making a success of it. How can you play Russian Roulette without live ammunition? If so there would be no emotion involved. It would be far far better to fund an account where the opportunity to trade micro lots is available instead. With such an account it is possible to find out what your preferred broker is really like. More importantly, to discover your own trading emotions and what measures you may need to take in overcoming them. Whilst learning to trade it is better to lose a little and learn a lot – any losses can be put down to educational fees. With progress then the stakes can be raised.

What other benefits does a Micro account offer?

The main one is that you can discover if your broker offers everything that he promises, such as: execution, no requotes, customer support, withdrawals, market news, indicators, the small print ie other fees, margin calls, etc etc. Where your money is involved – YOU need to be in control.

Your emotions will probably be in proportion to the amount you are risking during a live trading environment. Micro trading is a good time to analyse yourself whilst making and losing small amounts, and not just concentrating on your trading strategy. These emotions are a VERY important part of your whole trading environment so please do not by-pass these ’emotional’ lessons that will undoubtedly save you money in the long run.

Get to know your broker and the platform he provides, if you are not happy then move elsewhere. There are thousands of brokers these days and they are all fighting for your custom, they don’t want to lose you to another competitor. So do not fail to contact them if you are not happy with any part of your dealings with them.

YOU control YOUR money. NOT them.

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