Attaining success as a forex trader is not that easy for a beginner. The volatile forex market provides many opportunities to trade and earn profits, but the results you get from trading greatly depend on your knowledge, skills and performance. Novice traders must learn systematically and practice to develop their trading skills. Theoretical knowledge can be obtained by reading, but practice and experience are essential to gain practical knowledge. In that case, a demo account is one indispensable tool you will need to use. Continue Reading
But if you are good at demo trading, does that make you a good trader? Can a demo account be an indicator of trading skills? These are some frequently asked questions about demo trading, and today, you will get to know the answers from this article.
How Is Demo Trading Different?
As you may already know, demo accounts are set up to mirror the trading environment that you get on a live account, and you get to trade in real-time market conditions. However, demo accounts are imperfect, and the trading experience you get on a demo account will slightly differ from live trading. Let’s look into the differences to understand this better.
- Difference in execution – The execution of trades on a live account is dependent on the number of buyers and sellers available to fill the order. When we trade in the forex market, we can choose between a market order and a pending one. Pending orders will be executed at a specified price level, whereas market orders will be executed at the current market price. But when it comes to live trading, there is a good amount of chance for the order to get filled at a different price than what we saw on screen at the time of placing the order. This happens due to slippage or price re-quotes.
When you are demo trading, you won’t get to experience slippage or price re-quotes like how it normally happens in live trading. Other than this, the market orders placed on a live account will be queued as the broker has to look for a matching order to fill it. Although the demo accounts offer the same market conditions, it will be hard to match the orders with any real order being placed. Hence, the orders placed on a demo account will not be queued and it gets filed earlier. If you place the same order on a demo and live account simultaneously, the demo account order will be executed before the live account order.
- More capital – As we all know, virtual funds are utilised for demo trading, and this removes the risk of losing real money in the trading process. Forex brokers often offer a huge amount of capital for demo trading. Most brokers provide a $10,000 balance on demo accounts, and you can place a large number of trades with that much money. But when you trade on a live account, you may not risk such a huge amount in the first place, and thus, you will surely feel a difference in trading.Although the funds on a demo account aren’t real, the feeling of having more than enough money will give you a false sense of security as you can afford to lose more and won’t hesitate to place more trades. Hence, you may feel the urge to take more risks while demo trading, which may not be practical while trading with your own funds. In fact, you need to pay the most attention to risk management on a live account, but the excess capital on a demo account may encourage you to take an excess risk, and this leads to a significant difference in your performance and results.
- The difference in mental state – The mental state of a trader using a demo account will be very different from someone trading on a live account. We are often told to trade the demo like its real account, but it will be hard to evoke the emotional response one feels during live trading. In live trading, the emotions come naturally as you are aware of the risk and the opportunity for rewards. You will surely feel a lot of emotions like fear, excitement, stress and greed. Emotional control and trading psychology are integral in live trading, but learning about these aspects on a demo account would be hard. You will always feel way more relaxed and confident while trading on a demo account, as you are not really bothered about the risk.You won’t be worried about making mistakes and won’t think much before placing a trade as it does not have any real outcome. This emotional detachment can actually improve your performance on a demo account at times, while you may struggle to do the same on a live account. On the flip side, many traders treat demo trading as a game and often become careless about their decisions. This kind of unserious approach can also lead to deviation in your trading performance, which will also be reflected in the demo trading results.
Tips to make Demo Trading Realistic
Now, we know the differences between a demo and a live account, leading to a deviation in the results we get while trading in both. That is why we can’t really consider demo account performance or results to be a good indicator of your trading skills. A trader being profitable on a demo account does not give a guarantee for their success in live trading. In fact, it is highly unlikely to get similar trading results on demo and live accounts.
But I will be sharing some tips you can follow for making demo trading as realistic as possible so that you get all the benefits of demo trading.
- Make it realistic – The trading conditions you get on a demo account are very realistic, but the execution of trades may not be as real as you think. As I mentioned, the trades you place on a demo account will get filled at the same price you wanted, while it is not possible in live trading with queuing and re-quotes. There is no way to replicate these incidents in demo trading, but you can make it realistic by making some assumptions about how the trade would have turned out in the live market. If you see that the chances of an order being filled are thin in the real market, then you should never include it while assessing your performance. You need to forget about that trade and remove its profits/losses from your overall trading results.
- Combine trading psychology – Another drawback of demo trading is that traders don’t get to experience the emotional rollercoaster they go through while trading on a live account. Hence, they don’t get to learn about trading psychology or emotional control on a demo account. You need to treat the virtual funds like your own money; that way, you can bring some of the emotional aspects of trading. Seeing it as real funds will stop you from being frivolous while demo trading. The losses you see on a demo account can be very damaging if it is a real account. It is not easy to do this, but it will help you have better emotional control in live trading later on.
- Trade with lesser capital – I suggest you trade the demo with the same amount of capital you will use on a live account. If you are not going to fund your account for $10,000, then it would be better to request your broker to change the demo account balance. If changing your account balance is impossible, you need to limit the usage of funds and keep it realistic. Doing this lets you learn about risk management and limiting risk per trade from the demo account itself. I suggest using tools such as a margin calculator as it helps you to learn about margin requirements and leverage usage, which are important in live trading.
- Consider slippage – Slippage is normal when there is a low trade volume and high volatility. Some currency pairs are more prone to slippage than others, and you must consider all such aspects in demo trading. If you are demo trading during volatile hours, the trade will get executed without any slippage on the demo account, but you need to keep it in mind while reviewing the results.
The Bottom Line
In the end, demo trading performance cannot be used as a reliable indicator of trading skills; instead, it is a tool for practice and helps you enhance your skills in a risk-free environment. But you need to trade with realistic assumptions; that way, it will be easier to transition to live trading. [/find]