Home / Beginners / Demo Trading VS Live Trading – What You Have To Know

Demo Trading VS Live Trading – What You Have To Know

One of the most commonly asked questions new traders have is how long they should stay on demo trading and what to do when they demo trade. My view on demo trading stands in contrast to what you usually read about demo trading on most other websites, but I am a strong believer that if you want to make it in this business, you can’t listen to the common advice. 99% of all traders read the same stuff, get the same advice and follow the same path – and they all end up losing money. It’s time to think differently and approach trading from a different perspective, at least that’s how I did it and it has worked for me.

Extra: Here is how you install MetaTrader4, one of the most popular trading platforms.

 

No question, demo first!

No doubt, every trader should start on demo first and he should stay on demo trading for at least the first 2-3 months. The biggest mistake I see people make is that they can’t make the transition from demo to live trading and they are stuck with their demo trading WAY too long. Staying on demo too long will ruin your way of trading as we will see later.

 

 

Purpose of demo trading

When it comes to demo trading, you have to ask yourself what your goals are with demo trading and what you want to achieve so that you can objectively judge when you reached those goals and can move on to live trading. There are 3 main things that demo trading is for:

 

1) Understand the platform

Especially for new traders, it is important that you get to know your trading platform very intimately. You should try every button and test every feature of your platform. Thinking about how to use your platform while you are making live trades is a clear sign that you transitioned too fast.

 

2) Order dynamics

Depending on the market you trade, you have to make sure that you understand the different order types and also how to execute your trades. Demo is the ideal place for that because your actions don’t have any consequences.

Try to understand what the difference between a market and a pending order is. How does a stop vs. a limit order work. How can you place stop loss and take profit orders for your trades and what happens when price reaches those orders?

Just try out all different order types and observe what happens. You’ll very quickly understand what the different orders do and it’s surprising how many people don’t do this simple step.

 

3) Get a feel for market dynamics

Especially if you are a new trader, this part is key to avoid large losses and unnecessary trading mistakes. During your 3 months on demo trading, pay close attention to market dynamics, how price moves and note down everything that catches your attention.

Here is my checklist for things to look for when getting to know price and market dynamics:

  • When does price move the fastest and when doesn’t it move?
  • How do price movements differ across different markets, forex pairs, timeframes?
  • Which timeframe works best for your daily schedule?
  • How do news impact price movements? Which news are the biggest movers?
  • What type of price behavior do you feel most comfortable with?
  • Do you see lots of gaps and how can you deal with them?
  • Are you OK with overnight positions?

 

 

What demo trading can’t do

It’s so important to understand the limitations of demo trading and what demo trading can’t do for you and what you should not expect from it. The majority of traders will, however, look at the points below and still try to make them work with their demo trading – big mistake.

Further reading: How to survive your first year(s) as a trader

 

1) Validating your system

This is probably the cardinal sin of demo trading, yet so many do it. You can’t validate your trading method and the profitability of your trading strategy on a demo account. It does not matter how good your results are on a demo account, they mean NOTHING when you change to a live trading account.

Demo trading is like riding a bike with training wheels on; you won’t crash and hurt yourself too much but once you take the training wheels off you are not going to be a good cyclist.

As I said above, demo trading should only be used to get to know your platform, the way you execute orders and how price dynamics work; it can’t be used to confirm your method.

You might build a little confidence and also understand how to execute your trades within the scope of your trading method, but good demo results never translate to good live trading results.

 

 

2) Preparing you for live trading

Demo and live trading are two very different things and from a pure trading perspective they have nothing to do with each other. Once you have some live trading experience under your belt, you’ll know that the greatest challenges a trader faces are NOT related to following price and identifying a trade, but they are purely emotional nature and only exists because of the money involved. Here a short checklist of the things demo trading can’t prepare you for:

  • The discipline of waiting for days for the right moment to enter a trade
  • Dealing with the pressure once you are in a trade and the uncertainty
  • The emotions that make you stay in a loss longer and let you cut profits too early
  • FOMO and entering too early because you want to make more money
  • Not wanting to lose money and passing on valid trading opportunities
  • Being too greedy on the exit and not closing your profitable trade

 

Many traders will argue that you just have to treat your demo trading as if it was real money to get the best results. The problem with that is that it’s not possible. You will ALWAYS know that it’s just demo trading – you can’t fool yourself that easily.

 

The greatest danger of demo trading

The biggest problem traders who stay on demo too long have is that their undisciplined trading behavior becomes a part of their general approach to trading. A trader who isn’t punished for his bad behavior and who doesn’t feel the pain is more likely to adopt a sloppy and unprofessional attitude and once he transitions to live trading, he will inevitably lose his money.

You won’t hear this too often but staying on demo too long actually does more harm than good.

 

How to transition from demo to live

Now that you know what to do and expect in demo trading, here are some tips that will help you make a smooth transition from demo to live trading:

 

1) Start small

You’ll inevitably lose your first (few) trading account(s) so it’s important that you trade with money you can afford to lose.

At the same time, you HAVE TO MAKE SURE that the money you are losing is worth it. This means that you know WHY you are losing and what you can do to stop it. Losing money without learning your lessons is a waste of your money and your time and it will keep you in this loop for a very long time ever.

 

2) Protect your emotional capital

We said it already, but it’s so important that you really get this point: you’ll inevitably lose money the first year(s), but protecting your emotional capital is even more important. A trader who loses his motivation, the fun and the excitement for trading becomes overly negative and frustrated is very likely to give up on trading completely.

Make sure that you understand your motives, don’t set yourself unrealistic expectations and don’t be too hard on yourself. Enjoy the process.

pyramid

 

3) Don’t focus on the money

You are not going to make money so it’s important that you focus on the right things during your early stages as a trader. Your top priorities should be developing discipline, trust in your rules and your system, building a strong trading routine and developing a passion for trading.

Those things, along with a strong and conservative money management approach, will make sure that you lay a solid foundation at the beginning which you then can leverage later on.

Further reading: If you want to make a million Dollars, start here

 

What are your thoughts about demo trading? What is holding you back and what are your greatest challenges and worries? Let us know in the comments below and we’re happy to help out where we can.

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13 comments

  1. Hi Rolf,

    I don’t understand why would anyone have to inevitably lose first (few) live trading account(s)? If you STRICKTLY obey only one MM rule to never risk more then 1 % of your equity per trade and never more than 6 % on all open positions ( I used modified 0.5 % per trade, 1,5 % on all open trades) you would have to be extremely unlucky to blow your account. Unless you get caught in black Swan situation, you have <0.01 % chance of ruining your account. It can happen but on the same probability scale as being hit by a car or even less.

    • I see where you are coming from and you are right. IF a trader WOULD be disciplined and follow the rules, it’s unlikely to blow up – I 100% agree here with you.
      However, that’s a big ‘IF’ and an unlikely ‘would’ and although most traders start with good intentions, the reality looks very different.

      Rolf

  2. Whilst I agree with the tenor of this piece I think there are certain elements that have been excluded.
    1)A Demo account treated with the same disciplined approach one applies to a live environment can teach a new trader his/her process. Good trading needs to be somewhat mechanical and emotion free. Going thru the motions over and over in a disciplined but stress free environment can help achieve that mechanical state.

    2) Transferring skills from a demo environment to a live one is very similar to transferring skills from a sports practice environment to a live competitive one. All top professional and amateur sports people acknowledge their devotion to practice and how getting the process allows them to transfer it to where the rubber meets the road in live competition.

    3) If you cannot double a demo account, where the stress levels are indeed lower how can you confidently expect to grow your live account. Losing real money is a huge demotivator for most traders. Losing money will as the writer says happen. However, if the losses can be minimized by having and using a practiced process that has previously doubled your account that will inevitably stand you in good stead when it gets rough as it will from time to time.

    4) Finally most trading veterans will tell you trading isn’t first and foremost about trade entry which is what most new traders worry about. It’s about your psychology, trade, money, risk and portfolio management. If you are learning these aspects of trading while at the same time worrying about every dollar lost and jumping for joy at every dollar won you wont don much learning. Instead you will focus on the outcomes and not the process – a sure way to lose money.

    • I understand your perspective. Let me share my view on your points:

      1) It’s impossible to treat a demo account the same. All traders will tell you that they want to treat it the same but they don’t. You will always know that it’s still demo and we can’t fool ourselves that easily.

      2) I agree when it comes to professionals but the average trader is as far from being professional as it gets.

      3) From my experience working with traders, trading successfully on demo won’t build confidence. Again, we can’t treat demo the same as real money trading because we always know it is not the same.

      4) I think you confused things here. I 100% agree that entries are not the same and that psychology is the most important aspect. However, the psychological challenges arise because of the money that is involved. Demo trading, thus, can’t prepare you for the psychological battle because you are completely avoiding this most important aspect of trading.

      Rolf

      • 3) This is true, just because a trader makes money on Demo doesn’t mean they’ll find it as easy to replicate Live, however Charles’ point is a valid one. If a trader _can’t_ consistently make money on Demo, they’re certainly not ready to transition to a Live account.

      • Agree.
        NO demo account practise can prepare you for having your money in the trade and seeing the position move against you. It doesn’t matter how small your position is.
        Although, if you keep to your rules and know your system’s rate of wins : losses, it helps keep the emotions under control.

  3. Totally agree, with my first trading system I started in real before a demo trading that was very good. What happened? I had some profits, then I get very emotional, put more risk, then loss a lot, then some revenge trades, and so on… finally I was looking signals where there were none (fooling myself) and my account was to zero in 1 month. I learned a lot from that experience: it doesn’t matter how much demo trading you have done, when you are in real trading the psicological traps are very, very, VERY present, like demons there waiting for you.

    The best advise is to trade very small, and practice your psicology. Real trading is the best way to make your psycology stronger. This is something a demo account can’t do. If you risk very small, you can practice a lot about your psicology in the trading enviroment, and when you have enough practice then go to the 1% risk rule or whatever your system tell you.

    • I agree. Trading microlots at first is essential. Earn the right to trade bigger size by trading well on smallest size. Increase the size very gradually. Emotionally one has to adapt to the increase.

  4. Is there any data, even survey data, corroborating the claim that only 1% of traders profit? I have no reason to disagree with this estimate, but have often wondered if the number was perhaps closer to 10%. Why do you estimate 1% — or do you have a source? Thanks.

  5. Fantastic points made, my own winning system on one of my first small live accounts taught me to remove risk and get the stop to a small profit first, and then catch the bigger move. And it worked. Taught me that you have to go through the boredom of small wins and small losses to be in the market for that one in five low risk big clean move. Now, I do use demos for refining my strategy now I know more about multi time frame analysis and news rhythm. Yes, I seemed to do even better when I was more ignorant. It’s getting that fine balance between letting the inner chimp loose at just the optimum time and level I have found. And never ever have an ego, no matter how many consistently winning weeks you have. Great resource, thanks for your efforts, wish there was stuff like this around seven years ago when I first started.

  6. p.s. not ALL traders start with the get rich quick mindset 😉

  7. I have found a forex trading simulator to be much more helpful than a demo account. It is very helpful in developing a good process (trading and money management) that one can test thoroughly, together with good trading habits. A simulator also helps one to explore different timeframes and markets and strategies, see statistically the results of these strategies and find the style and timeframe most suitable to one’s needs.
    After this step I would use a demo account to become familiar with the trading platform, and then shortly after t trade microlots with real money, ensuring that I can maintain the process & good trading habits developed with the simulator. Then very gradually trade with bigger size, again ensuring that my process remains good. As you say, trading well is the primary goal. Money flows from trading well.

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