All traders know that a demo account is a great opportunity, first, to test trading strategy on virtual money without risking your own money; second, to get acquainted with the trading terminal and evaluate its capabilities; third, to get skills in working on the currency or other markets; and fourth, to learn new financial instruments. These are the basic functions of a demo account. Everything seems to be simple and clear. However, trading on a demo account involves a lot of pitfalls that only some people talk about.
Firstly, it blunted emotions and reduced the sense of responsibility. On a demo account, beginners experience less strong emotions than traders when trading real money. Trading on a real account causes a storm of emotions that can be very difficult to handle. That’s why many traders who switch from a demo account to a real one quickly reduce their balance to zero. The conclusion is that when a trader has been trading on a demo account for a long time, it will be mentally and psychologically hard to change. And this process has a linear function. The longer a trader sits on a demo account, the harder it will be to switch to a real account. Solution: use a demo account exactly for the time you need to get acquainted with the trading platform and test your strategy. As a rule, this process takes from several weeks to several months.
Second. With demo accounts, traders tend to disregard discipline. The reason is that the trader has no fear of losing money and can easily open a new account and do it 10, 20, or 50 times a day. Because of this, the habit of indiscipline and inattention develops, which will negatively affect the trader on the real account in the future. Solution: when opening a demo account, specify the amount of deposit and leverage that will correspond to the trader’s real account in the future.
Third. On a demo account, traders tend to disregard the rules of risk management. For example, a trader gets a stop loss and decides to enter the next trade with a volume 2 or several times bigger in order to recoup the loss and make more profit. Or trader simply averages losing trades and increases the drawdown. On a real account, such actions will cause unpleasant emotions, as described above, and it also develops a habit in a trader to risk more than necessary. On real accounts, this thin line can lead to gambling and tilt. Solution: treat virtual money as real money and trade accordingly, with all the following risk management rules. Position sizes should be set up so that the trader feels more or less comfortable emotionally. For example, if a loss of $50 from one position is significant and causes negative emotions to the trader, then the loss amount must be reduced. Each trader must define this level individually.
The fourth. On a demo account, a trader will never grow as a trader. If a trader shows a profitable statement with 1-year history to an investor but from a demo account, the investor will most likely not pay attention to it. When working with investors, you need statements only from real accounts with 3-6 months of history. Solution: build up your history and keep it. First, an analysis of the history will show all of your strengths and weaknesses. Second, a trader’s account history is a resume for investors and hedge funds.
Fifth. On a demo and real accounts, trading conditions may be different. There can be different speeds of order execution, different slippages, leverage, etc. Of course, brokers try to provide the same conditions on demo accounts as they do on real accounts, but this does not always work out due to some technical peculiarities. For example, the broker’s real accounts may work directly with the liquidity provider, which has its own terms of execution and capital requirements. Solution: traders should be aware that the conditions of real and demo accounts can be different, and the brokerage company does not always cause it.
Have a good trade.
