Wednesday, May 12, 2010

The big difference between real and demo trading

Real VS Demo tradingMost brokers online offer demo trading options to try out their trading platform to get your 'feet wet' for real trading and show you how easy it is to navigate their software. Although the difference between the two on your screen might be just a simple drop down menu that says 'demo' or 'real'  there are significant differences and one real big one in my opinion.
First, using a real account with no longer fictional money in it you will be trading on a server that handles real transactions as well, meaning you have to deal with all the downfalls that come with it as well, such as slippage (your order is being executed at a price you didn't want), another reason why you don't want to use market orders but stop orders, a jump in spreads (the fee the broker charges at that split second you enter your order) etc.
Second and most important, you will become your own worst enemy, psychological speaking. All of a sudden you're in a real trade. Your heart starts pounding in your throat and you watch the trade closely because it's not a demo anymore, it's the real deal! If you are in a winning trade, when will you bail out and take max profits? (will you actually stick to your holy trading plan?)
Your trade goes the wrong way? Picture this. Just lost $5,000 in your demo account? That's a shame, just set up a new demo account and you have another sum of money to play with. Try that with real money. If you don't do or never have done trading with real money imaging how you would feel if you have lost a significant amount of real money. How would you react emotionally? Consider this. You can guess how you would respond to a situation like that. The truth is, you don't know until you've done it, after the damage is done. It all depends how financially well off you are, and how much you can afford to lose. Hopefully you were able to afford the loss and it has not made such an impact on your financial situation. That's why I strongly recommend never to trade with money you don't have (margin accounts) or can't afford to lose! Trading is taking on risk. Can you handle that risk. If you can't, trading is not for you and you might be better of with a savings account.

Demo trading is still the best option to practice

Don't get me wrong. I still believe there is no better way to learn trading than using a demo account. Paper trading, although recommended by many professionals in the industry, just doesn't work. At least not for me. It's not the same. Especially in Forex trading where prices and strategies update so frequently you won't have time to write all of it down. Also considering this way you will not get accustomed to the ins and outs of your trading platform, and this is very important. Your trading software is your main tool to trade and you need to know where all the buttons and numbers are instantly if you need to do something quick.
I think the best way to learn with a demo account is to treat it like real money, and I know this takes some imagination, but try. Alongside make a trading plan. I will soon devote a whole section in the 'education' section of my page on how to create a trading plan, at least how I made mine and what's in it.
It will better prepare you to become a better trader.

Some forex demo accounts (and platform) to try out for yourself:

 

and remember do not borrow money to trade (margin accounts) or trade with money you cannot afford to lose!

Disclaimer:

All opinions expressed, trade recommendations/advice on this website are solely of John van der Munnik and are not affiliated with any investment firm or any other organization. You should not make an investment only based using this website VDM Trading for your trading needs without seeking help from your own financial advisor.