Demo accounts have three uses:
- For brand new traders who need to learn the basic concepts of trading i.e. pips, long and short positions.
- Testing out a broker’s platform before going live.
- Primary testing for a new method.
That is all demo accounts should be used for PERIOD!
My email inbox is scary because it’s full of horror stories. They almost always start and end the same way. A newbie opens a demo account and triples his pretend money. Thinking he is a super trader he goes live with lots of money and loses it all.
Why?
Well think about it this way. If a little 8 year old boy pointed a toy gun at you and said “give me all your money” you would laugh. If some big tattooed grizzly bear looking guy on a Harley points a real gun at you and says “give me all your money” you would probably hand over the money. One is a small unintimidating child with a fake gun the other is a big intimidating criminal who robs people for a living.
The difference between demo and live trading is the same. On one hand, you got an unintimidating fake market on the other an intimidating live market in which you trade real money.
Even if you get a kid to point a toy gun at you 10 times a day for 6 months when the big dude on the Harley points his real gun at you, you won’t be prepared and you will hand over your money.
Many people use the flight simulator metaphor to advocate the use of demos. They say some rubbish about how pilots being trained on flight simulators relates to traders being trained on demo accounts. Talk about a flawed concept. Would you trust a pilot who has only ever flown on a simulator? I wouldn’t! All pilots have to log 1500 hours real flight time. Just as all boxers have to spar with real opponents and soldiers in training have to fire real bullets.
Demo trading is bullshit so let’s take a look at why:
1. You Don’t Trade Real Money – It is impossible to have that same sense of uneasiness on a demo account because it is like playing with Monopoly money. Think about it:
- It’s not real money on the line.
- There is no real risk.
- If the trade goes bad you won’t lose anything.
Every trader who has traded a live account knows about the ugly emotions live trades dredge up. Emotions like:
- The fear of a possible loss.
- Questioning of your analysis whenever a trade moves against you.
- Nervousness and anticipation of the end result.
While some of these feelings might be felt when demo trading, you will not feel them to the same extremes you would when you’re trading live.
Pro traders like me learn to control the nervousness. They do this by building up their confidence through live trading. The more trades you take the more confident you become and the more numbed you become to those negative emotions.
When a newbie first puts real money on the line those all those ugly emotions rear their heads. Since newbie’s have not learnt control the emotions can wreak havoc on their accounts. So a newbie has to learn to control those emotions before becoming a profitable trader.
Trading with Monopoly money cannot give you that same rush of destructive emotions. In fact, traders trading demos tend to take trades more liberally and they build up a false confidence. This often leads to developing bad habits such as risking too much.
It doesn’t matter what you tell yourself. The emotions you feel when the Harley dude points a real gun at you are different to the emotions you feel when the little boy points a fake gun at you.
2. Losses Don’t Feel as Real – I remember when I first started live trading. Whenever I entered a trade I would watch my charts like a hawk. This was especially true when a trade went against me. I would sit and watch, 2 pips, 3, 4, 5, 6……. With every pip that ticked away against me I could feel a little more money falling out of my pocket. I felt it, that stinging sense of loss, because it was real. When the trade finally hit my stop I was $200 poorer.
Would you feel that same sting of loss with a demo account? No! You might feel upset, annoyed even. However, you have the same amount of money in the bank as you had an hour ago. So that feeling of losing your hard earned cash doesn’t show up.
That sense of real loss is an important lesson for a newbie trader. You need to feel that loss to grow as a trader. You also need to numb yourself to that feeling. Every trader has losing trades and learning to accept losses is a valuable lesson a trader must learn.
To learn to accept loss you need to experience real loss.
3. Demos Are Rigged – This is certainly not true of all Forex brokers but much more brokers than you would think rig their demo accounts. Being slipped on entries and exits during volatile periods is a part of live trading. It happens and it’s the nature of the beast. We pro traders know that and deal with it.
However, many brokers out there offer demo accounts in which you get little to no slippage. This gives traders a false sense of how the market really works.
Personally, I would love to never be slipped a single pip on a trade, all traders would. However, sometimes broker just cannot fill you at the requested price. Sometimes you might be slipped 2 pips other times 10 pips. Slippage can eat into your profit margin significantly on some traders.
Many demos give you a false representation of the broker’s performance. So newbies who trade demos for 6 months are trading a much safer market. The real market has snares and traps that can catch or strangle the life out of an unaware newbies account.
Alternatives?
Easy, you just open a small micro account with $100 or more in it and trade live. This will allow you to:
- Trade real money and learn to control the negative emotions such as fear.
- Actually feel the sting of a loss and learn to deal with it.
- Experience actual market conditions and become accustomed to things such as slippage.
So if you’re a newbie who has been trading a demo for more than a few months it’s time to open a real account. Heaps of brokers offer small accounts and micro accounts, here are a few:
- GFT Forex
- Alpari
- FXDD
- Forex.com
GFT Forex are my personal favourite and I have been with GFT for about 5 years now. You can open a mini account with $250 USD.
When Demos are Ok
Demo accounts can be useful at times. You should only use them for the following reasons though:
- If you’re a complete newbie and need to familiarize yourself with Forex basics such as going long and short you should definitely mess around with a demo account for a few weeks.
- If you are considering going with a broker but you want to test their platform before committing.
- If you have developed a new method and you want to do some primary testing on the method to see if the concept works. However after primary testing you should thoroughly test any method on a small live account.
If you’re trading a demo account for any other reasons, it’s time to find your courage and commit to a live account. Do not open a live account with your life savings. Instead start with only an amount you can afford to lose.
Agree or disagree? Discuss below. This is a very important subject so I would like to hear other opinions.