Pros and Cons of Demo Trading

[RichardCox 10]

One of the first pieces of advice that is given to new traders is that it always makes the most sense to start trading with a demo account. While this approach has some clear advantages and allows you to become familiar with your trading station, general position strategy, and the forex market itself -- there are some drawbacks as well. So, it makes sense to have an idea of where potential pitfalls lie because, at some stage, all traders will have to make the leap from virtual trading to the real thing. Here we will touch briefly on the benefits that are offered by virtual accounts and then compare those to some of the weaknesses and deficiencies that are created by these types of trades. It is important to understand the differences here, as this is the only way to insure that you are truly ready to start actively trading with real money.

 

Benefits of Demo Trading

 

Any trader that does not begin trading using a demo platform can (and probably will) suffer sizable losses in a short period of time. Forex markets have the tendency to see extreme changes in volatility during certain parts of the week (for example, when a critical piece of economic data is released), and for those opening leveraged trades, these moves can prove disastrous when they work out unfavorably. Demo trading allows us to get a better sense of the ebb and flow of market behavior and to position accordingly. Also, for those with automated Expert Advisor (EA) strategies, demo trading will allow you to test your strategy using real market conditions, in order to determine its efficacy.

 

Next, trading with a demo account will allow you to familiarize yourself with all aspects of your platform without risking material mistakes. With all of the software platforms available now, it is important that traders understand how exactly to go long or short on a pair, how to set stop losses and profit targets, how to attach indicators to your chart, and how to manage your open positions. Clicking the wrong button can cost real money without this knowledge, so it is important to have a firm understanding of your platform before going live.

 

Last, demo trading can allow you to monitor the effects of leveraged positioning. Trading accounts can see massive fluctuations in balance when leverage is used, and practicing with certain leverage ratios can help you protect your account down the road. Some brokers allow leverage of up to 500:1, so a trader that wants to take advantage of these offers should try a few trades with these excessive leverage levels with a practice account so they can see how quickly these position sizes can influence your account balance.

 

Limitations of Demo Trading

 

So while demo trading is highly valuable, there are many examples of individuals that hold onto their demo accounts longer than they should. And while the drawbacks here might not be readily apparent, they most certainly do exist. First, with demo trading it is impossible to develop a sense of the emotional reactions (fear vs. greed) that will be encountered when live positions are open and active. In order to be a successful trader, you will need to manage these emotions and make decisions in an objective and logical manner. In trading, fear is healthy because it means you are aware of what is at stake. Managing that fear in constructive ways is the real task, and it is impossible to learn to do this when demo trading. Demo trading gives the illusion that your positions will have no real monetary consequences, and this can create problems once you make the transition to a live account.

 

Next is that demo trading can create unrealistic expectations. It is easy to become over-confident when demo trading because it is much easier to simply wait for your positions to turn positive before closing them out. This is not something that can be done when trading live because your account size is finite (as opposed to the infinite account size you have when trading with virtual money). When using real money, there may come a time when unrealized losses are accumulating too quickly and your positions will need to be closed, either manually by you -- or through a margin call. Because of this, it can appear as though trading is much easier than it actually is, if all we have is experience with demo accounts.

 

Last, it is impossible to know how committed we truly are to a trading strategy if real money is not being put at risk. It can be easy to make the decision to open or close a position when demo trading, but this is not always the case for live accounts. If you are able to pull the trigger on a trade, it is a good indication that you have real confidence in the ability of your trading system to generate consistent profits. Once a position is open, many decisions will need to be made. Where will you place your stop loss and profit target? Will you move your stop loss if the trade moves in your favor? When will you move that stop loss and by how much? If the trade works against you, will you add to the position? Are there any circumstances where you will close out the trade, even if the stop loss or profit target has not been hit?

 

These are all questions you will need to be able to answer in order to trade with real money. And you will need to know how you will truly react once these situations present themselves. Unfortunately, demo trading will only give you a diluted sense of how you will really act in live environments. The only way to get a true idea of your likely strategy and behaviors will be to start getting active with a live account.

 

Conclusion: Demo Trading is Useful, But Gives Only a Limited Picture of Live Environments

 

Make no mistake, it is absolutely essential for new traders to get early practice with demo accounts. This should also be viewed as a requirement for those transitioning to trading software or a new brokerage company. Backtesting results for those using EA will also need to run these tests using a virtual account. But once these preliminary lessons are learned, it is time to move on, or you run the risk of developing trading habits that are not useful. Moving into live trading will allow you to improve your trading discipline and cultivate behaviors that will lead to consistent profitability over time. Risk management skills become honed much more quickly when traders have a real stake in their positions, and this is something that cannot be truly achieved using a demo account. So, while virtual positions do have tremendous value, it is important to note the differences between these two environments, so that avoidable mistakes are not made down the line.

[supportoranges 10]

I think the idea that an inexperienced trader has to trade with real money to help learn the emotional aspect is a myth.

First they need to learn how to trade.

Also, I don't believe that there is no stress when demo trading.

If one is very motivated to become a trader and it is very important to them, they will know they have to become consistently profitable in order to pay their own bills.

It can be very stressful and emotional if their demo experience becomes important to them. They have to know that if they cannot trade in demo, then they cannot trade in real.

I think it is also a myth that 'anybody can make money in demo'. That may be true on some days. But even in demo, try proving that you are consistently profitable for three months.

If one's demo experience is important to them, and it should be, then they will care and they will become emotional. If they don't care then they are not taking their ambitions seriously.

[davidjohnhall 10]

Interesting. I once ran a little trading experiment with a few friends in which we traded demo accounts but made each entry and exit transparent to the rest of the group.

 

There was no money on the line -- but you know what -- the stress level was high. Why? Because we were trading ego capital.

 

I urge anyone to give it a try. It's demo trading plus. No capital, but tons of emotions. I learned a lot about myself doing that experiment. And it definitely helped my live trading.

 

Good luck to you!

[RichardCox 10]

I think the idea that an inexperienced trader has to trade with real money to help learn the emotional aspect is a myth.

First they need to learn how to trade.

Also, I don't believe that there is no stress when demo trading.

If one is very motivated to become a trader and it is very important to them, they will know they have to become consistently profitable in order to pay their own bills.

It can be very stressful and emotional if their demo experience becomes important to them. They have to know that if they cannot trade in demo, then they cannot trade in real.

I think it is also a myth that 'anybody can make money in demo'. That may be true on some days. But even in demo, try proving that you are consistently profitable for three months.

If one's demo experience is important to them, and it should be, then they will care and they will become emotional. If they don't care then they are not taking their ambitions seriously.

 

Of course, it is important and valuable to start with demo trading. But I am not sure why you think that managing trades, emotions or truly knowing how we respond to changing markets when live positions are on the line would be the same thing?

[supportoranges 10]

Of course, it is important and valuable to start with demo trading. But I am not sure why you think that managing trades, emotions or truly knowing how we respond to changing markets when live positions are on the line would be the same thing?

 

What I am saying is that articles, like this one, that encourage traders to get their feet wet in real money create real problems.

 

On what platform, real or demo, does one create and learn how to execute a positive expectancy system? It's my opinion that traders who have accomplished this would not be spending their time on these type of threads.

 

Therefore, traders who do not have a positive expectancy system yet get sucked into real and blow out their accounts because they really think they need to overcome their emotion and don't even know what they don't know.

[leobust 10]

For a newbie trader, the best analogy would be a trainee soldier.

Demo trading:

Is when a trainee soldier fires at the "enemy" without the enemy firing back.

The soldier is 100% confident that nothing will happen to him as its just a pretend "battle".

Live trading:

The trainee soldier goes to a real battle for the first time. His mind is pre-occupied with the notion that this time, the chance of being killed is now a reality, as the enemy will also fire back with live bullets. His hands will be trembling and sweating. His heart will be beating faster. His glands will secrete bitter fluids. His head will be sweating corns.:crap:

 

Seriously, demo trading is excellent for testing setups and learning new softwares.:o

But there is NO substitute for live trading if you wanted to learn trading. Live trading teaches you how to control your emotion, in which demo trading can't provide. The trick is to start with one contract until you get the hang of it, and gradually add as you gain experience and expertise.:

[mickeybh 10]

I have been demo trading for about 6 weeks. I have plenty of live trading experience all to about a breakeven. I think two reasons. 1. never worked at it hard enough, 2. I didnt know what real trading was.

 

Recently I have educated myself with reading the order flow, reading the tape etc. I have bought the zigsaw DOM, and use the footprint charts. I know what trading money is but need to see if this new look / way of trading would help. As the poster who says you have to learn to trade, it is true. I also traded a combine at TopStep trader and came very close to passing it, taken new job so can't go that route.

 

To conclude, if taken seriously, demo trading will get you to an understanding of what it will take to trade. I have traded the size (1 to 4) and limits (24 tick loss) I believe I will trade live and am profitable consistently over the 6 weeks (partial and full days). I have done a few trades I know I would'nt do live, but few. My winner ratio is about 60-40, which isnt bad and make 200 to 500 on 1 to 4 contracts (when I win), biggest draw down about 700 which hopefully I wont get stupid like that live. Overall up $4,100.

 

So now the test, I have flexible hours so I plan to trade the ES from about 0700 EST thru the open. One thing about trading is you have to confident and cant be afraid of losing a little money it will happen, just dont lose big. We will see.

[RichardCox 10]

I have been demo trading for about 6 weeks. I have plenty of live trading experience all to about a breakeven. I think two reasons. 1. never worked at it hard enough, 2. I didnt know what real trading was.

 

Recently I have educated myself with reading the order flow, reading the tape etc. I have bought the zigsaw DOM, and use the footprint charts. I know what trading money is but need to see if this new look / way of trading would help. As the poster who says you have to learn to trade, it is true. I also traded a combine at TopStep trader and came very close to passing it, taken new job so can't go that route.

 

To conclude, if taken seriously, demo trading will get you to an understanding of what it will take to trade. I have traded the size (1 to 4) and limits (24 tick loss) I believe I will trade live and am profitable consistently over the 6 weeks (partial and full days). I have done a few trades I know I would'nt do live, but few. My winner ratio is about 60-40, which isnt bad and make 200 to 500 on 1 to 4 contracts (when I win), biggest draw down about 700 which hopefully I wont get stupid like that live. Overall up $4,100.

 

So now the test, I have flexible hours so I plan to trade the ES from about 0700 EST thru the open. One thing about trading is you have to confident and cant be afraid of losing a little money it will happen, just dont lose big. We will see.

 

It looks like you are starting with the right mindset. Remember, there is nothing wrong with starting with very small trade sizes at first.

[mickeybh 10]

It looks like you are starting with the right mindset. Remember, there is nothing wrong with starting with very small trade sizes at first.

 

Thanks Richard, this is a tough ballgame, not for the faint of heart. Knowing what you're doing is 90% of the game. My goal is just to make maybe a grand a week to start, keeping 1 to 2 lot trades. I enter with half then add the other half if I get the chance. I know you probably know but you can get some good traded in from 0630 to 0900, because it's all speculative at that point, and the action is slower, which gives me a better read.

[RichardCox 10]

Thanks Richard, this is a tough ballgame, not for the faint of heart. Knowing what you're doing is 90% of the game. My goal is just to make maybe a grand a week to start, keeping 1 to 2 lot trades. I enter with half then add the other half if I get the chance. I know you probably know but you can get some good traded in from 0630 to 0900, because it's all speculative at that point, and the action is slower, which gives me a better read.

 

Honestly, I wouldn't recommend starting off with a dollar figure in mind (like $1,000 a week). I would base things more on your account size and then just risk the standard 2-3% when you see a good trading possibility.

[RichardCox 10]

Thanks Richard, this is a tough ballgame, not for the faint of heart. Knowing what you're doing is 90% of the game. My goal is just to make maybe a grand a week to start, keeping 1 to 2 lot trades. I enter with half then add the other half if I get the chance. I know you probably know but you can get some good traded in from 0630 to 0900, because it's all speculative at that point, and the action is slower, which gives me a better read.

 

Honestly, I wouldn't recommend starting off with a dollar figure in mind (like $1,000 a week). I would base things more on your account size and then just risk the standard 2-3% when you see a good trading possibility.

[mickeybh 10]

Honestly, I wouldn't recommend starting off with a dollar figure in mind (like $1,000 a week). I would base things more on your account size and then just risk the standard 2-3% when you see a good trading possibility.

 

Thanks Richard, but honestly after the hard work I've put into this, that's what I expect of myself. You need the goal then measure your performance then go from there. Maybe the $1,000 is on the high side but will get there.

[RichardCox 10]

Thanks Richard, but honestly after the hard work I've put into this, that's what I expect of myself. You need the goal then measure your performance then go from there. Maybe the $1,000 is on the high side but will get there.

 

What will you do if you aren't able to meet this goal?

[mickeybh 10]

What will you do if you aren't able to meet this goal?

 

Make less or lose some, but will keep at it.

[newmillionaire 10]

With the know fact that only 5% of traders survive then I think it is a good idea to have a system that does all the thinking and all the predictions. With this the probability of you falling in the 95% will be slim.

[RichardCox 10]

With the know fact that only 5% of traders survive then I think it is a good idea to have a system that does all the thinking and all the predictions. With this the probability of you falling in the 95% will be slim.

 

A system that does all the thinking and all the predictions? Easier said than done, don't you think?

 

If something like this was actually possible, wouldn't everyone have a successful trading account?

[BlueHorseshoe 10]

I think it is also a myth that 'anybody can make money in demo'.

 

It's not a myth. I can teach anyone to make money in demo. They'll make money most days, certainly every week, and without a doubt every month . . .

 

The issue is to do with the way that demo platforms fill limit orders. Traders systematically under-estimate the impact of the spread (ie. market orders vs limit orders) on their trading.

 

I have seen very experienced traders unable to make money day-trading directional strategies - they end up net neutral - if they didn't have the spread costs they'd probably have made an amount equal to 20-30% - a strong return. If you're not realistic about how these costs impact upon your performance then you need to think again - these costs can add up to your entire weeks'/month's/year's profit.

 

If all of the above is giving you difficulty then you need to get outside the zone where these costs matter - swing or position trade (not so glamourous, I know!).

 

If you want to test your ideas in demo mode then you should click to buy/sell at market. If you actually intend to use limit orders then you can be re-assured that your actual performance will outstrip what you achieve in demo mode . . . despite the ubiquity of the algorithmic scalper, mutual funds and trend followers persist - why? Because they're not bothered about paying the spread . . .

 

If you're demo trading then assume you pay the spread.

 

BlueHorseshoe