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Why Demo trading? What are the Differences between Demo Trading and Live Trading

why demo trading

What is a demo account | Forex Training Courses | Plan B Trading

One of the most frequent questions all new traders have is Why Demo trading?  And how long they should remain in demo trading? My opinion on this matter is in contrast to what is often read about trade in most other websites, but I am a firm believer that if you want to be in this business for long, you should not listen to the common council. 99% of all traders read the same things, get the same advice and follow the same path – and they end up losing money. It’s time to think differently and trade approach from a different perspective, at least that’s how I did it and it has worked.

Undoubtedly, demo first!

Undoubtedly, every trader should begin with Demo trading and he must remain in demo trading for at least the first 2-3 months. The biggest mistake I see people make is that they can not make the transition from demo trading to live trading and are stuck with their way of demo trading for too long. Staying too long with demo will ruin your trading all the way. So, why demo trading? What are the purposes of demo? Let us have a look:

Why Demo Trading?

When it comes to a demo trading, you have to determine what is your goal with demo trading and what you want to achieve from it. So, you can objectively judge when is the time you will think that you have learned trading and now you can go on to live trading. There are 3 main purposes of demo trading:

1) Understand the platform

why demo trading? obviously for understanding how a Forex trading platform works. Especially for new traders, it is important to get to know the trading platform very intimately. You should try all the buttons and test all the features of its platform. Thinking about how to use your platform while you are making live trades is a clear sign that you have transitioned too fast.

2) The dynamic of the order

Depending on the market you trade, you have to make sure you understand the different types of orders and also how to order the trades. Demo is ideal for that because your actions have no harmful consequences as you are not putting your real money on the trades.

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

Just try all kinds of different orders and observe what happens. You’ll understand very quickly what the different orders to do and it is surprising how many people do not do this simple step.

3) Have an idea of ​​market dynamics

Especially if you are a new trader, this part is the key to avoid big losses and unnecessary errors trade. During the 3 months in the demo trade, pay close attention to market dynamics, how the price moves and write down everything that catches your attention.

Here is my list of things to look for when know the dynamics of prices and market:

  • When prices move faster and when it’s not moving?
  • How price movements differ between different market, currency pairs, time frames?
  • What time frame works best for your daily schedule?
  • How price movements impact news? What news have the biggest influence?
  • What kind of price behavior feels more comfortable?
  • Do you see a lot of gaps and how you can deal with them?
  • Are you okay with overnight positions?

Limitations of Demo trading

Now that you learned why demo trading, it is important to understand the limitations of demo trading. It is very important to understand the limitations of demo trading, what demo account can not do for you and what not to expect from demo trading. Most traders, however, look at the points below and still try to make them work with demo trading – that is a big mistake.

1) Validation of system

This is probably the cardinal sin of demo trading. You can not validate the method of trading and profitability of your trading strategy on a demo account. No matter how good your results are in a demo account, they do not mean anything when you switch to a real account.

Demo trading is like riding a bicycle with training wheels; it does not crash and hurt yourself too much, but once you take the training wheels are not going to be a good rider.

As I said earlier, demo trading should only be used to get to know your platform, how to execute the orders and how the dynamics of price works; It can not be used to confirm the method.

It is possible to build a little confidence and also understand how to order trades within the scope of your trading method, but good results demo trading never translate into good results in live trading.

2) The preparation for live trade

Demo and live trading are two very different things and from a purely trading perspective have nothing to do with each other. Once you have some real experience operating under your belt, you will know that the biggest challenges facing a trader unrelated to the next price and identification of a trade, but they are purely emotional and exists only because of the money involved. Here is a short checklist of things that you wont get from demo trading:

  • You wont learn to wait for days for the right time to enter a trade
  • Coping with the pressure of trading uncertainty
  • Staying in a loss and wait for profit opportunities
  • FOMO and enter too early because you  want to make more money
  • Not wanting to lose money and misses good profit opportunities
  • Being too greedy and not closing trade on profit

Many traders argue that you just have to treat your trade show as if it were real money to get the best results. The problem with this is that it is not possible. You always know it’s only trade show – you can not fool himself so easily.

The dangers of demo trading

The biggest problems of traders is that they remain in the demo trading for too long and their undisciplined trading behavior becomes a part of overall trading approach. A trader who is not punished for misbehavior and does not feel the pain is more likely to adopt a careless and unprofessional attitude and once the transition from live trading, which inevitably will cause you lose your money. You will not hear this very often, but staying too long on demo trading actually does more harm than good. Why demo trading for too long if 2-3 month’s trading can provide you with all the experience you need!

How to make the transition from demo trading to live trading

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

1) Start small

If not inevitably lose your first account in few trades, so it is important that trade with money you can afford to lose. At the same time, you have to make sure that the money is worth losing. This means that you know why you are losing and what you can do to stop it. Losing money without learning their lessons is a waste of your money and your time and will remain in this loop for a long time ever.

2) Protect your emotional capital

We have already said, but it is so important that you really get this point: inevitably going to lose money the first year (s), but the protection of their emotional capital is even more important. A trader who loses his motivation, fun and excitement for trade becomes too negative and frustrated is very likely to give up the negotiation altogether.

Make sure you understand your reasons, do not set unrealistic expectations and not be too hard on yourself. Enjoy the process.

Why Demo trading

3) Do not focus on the money

You are not going to make money so it is important that you focus on the right things during its early stages as a trader. Its main priorities should be the development of the discipline, confidence in its rules and system, creating a routine of strong trade and developing a passion for trade.

The Bottom Line

These things, along with a strong focus on conservative money management, will ensure that you put a solid foundation at first, then the rest can be exploited later with strong motives, experience and knowledge about the market.

We would like to recommend you another related article from Investopedia: Demo before you dive in

What are your thoughts on why Demo trading? What is still holding you back and what you think are the biggest challenges and concerns? Let us know in the comments below and we are willing to help you as much we can.

About the author

Yan

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