Demo Trading vs Live trading
Which approach is better for new traders?
When it comes to entering the trading world, a lot of doubts surge regarding the risk of losing our hard-earned capital. Most brokers offer the option to start in this speculative and volatile environment with a demo account, which allows newbies practice with virtual money raging between 20k to 50k. Sounds great? Well, it depends pretty much on how well you know yourself when it comes to money and emotions. Let's dive more into it.
This method is ideal for people who have little or null knowledge in trading, and want to practice on their own (by making mistakes) with this activity to develop and test profitable strategies. Whereas this may be useful at first sight, it is necessary to consider certain aspects before opening a demo account instead of a real one.
A demo account for a trader is like a flight simulator for a pilot student in an aviation school. Risking too much money that you cannot afford to lose or trying to do trading as a solution to a critical economic situation is not going to help at all. Instead, it will make you an easy prey of your uncontrolled emotions.
A demo account tries to mimmic a real-world trading environment. What this means is that the execution of trade orders is simulated to show what should happen in a certain case. This being when the order you enter executes at exactly the price, time and in the quantity, you would want it to. It also helps in understanding the platform you will be working on and all its features and develop a trading management plan.
Here are some subtle differences to be aware of:
• There is no reward for good executions or negative consequences for operating poorly. Independently of the outcome of your decisions, a demo trader will not get the real emotions to build the necessary discipline and structure to become a successful trader. At the end of the day, you sleep like a baby with no worries about your virtual money performance.
• Re-quotes and slippage. According to IC markets, “slippage is best described as the difference between the price requested and the price at which the order is filled. A re-quote is similar though rather than the broker going ahead and filling your order at a negative/positive price, a notification with the option of executing at the available price is sent, be it a favorable or unfavorable price”.
Conversely, a live trading account is opened with real money and requires a higher level of responsibility (unless you don’t care losing all your funds), a solid trading plan to stick to and a journal to address any psychological/market issues that need improvements. In this scenario, trader’s decisions are influenced by two opposing emotions: fear and greed.
Here, the trader understands the importance of managing the risk and gets the feeling of how the market functions. What becomes more vital is how the trader deals with daily volatility and adjust accordingly. Live trading sharpens a strong character since any human-being (including myself) is highly influenced by emotions, especially when money is involved. You have to be realistic and not to pretend to pay off your mortgage in a month and take your partner to Dubai and spend two weeks in the Burj Al Arab.
Trading doesn’t work that way. In order to achieve profitability, you must be patient and be willing to learn from your own mistakes. Self-discipline is key for building a long-term profitable portfolio. Many people have made a living out of this activity, but once again, it took long hours of work and dedication. It’s foolish to expect overnight success. There are endless gurus out there trying to sell you the get-rich-quick plan. Trust me, they don’t care about your education and growth; they just want your money. If you really want to get something out of this, treat trading like a real business (regardless what asset you’ll be working with) instead of a hobby.
To sum up, the main difference between a demo account and live account is the real emotions of the trader and the way he or she operates with virtual or real money respectively. Another crude reality is that you, as a trader, must know yourself well enough before deciding which account suits you best. By this, I mean how much time you, the trader, will dedicate to the account whether demo or live, how much money you can afford to lose, how well educated or familiarized you are with the strategies and trading vocabulary, which timeframe you will be work on, and what kind of investor you want to be (active or passive). Personally, I prefer to start straight with a real trading account because this forces me to stay more committed and focused on it. Besides, as time goes on, there can be important events or relevant news that fluctuate key movements of the markets, and those are opportunities a trader cannot let go. If you decide to start with the demo, you should keep your job and keep trading as a side hustle, study in your free time, and get acquainted with experts in the field.