Red sky at night equals sailor’s delight, but demo account in morning could mean traders take warning. One of the reasons, is that demo accounts are considered by some to be a double edged sword. On one hand, they are very useful in learning most aspects of trading. They are also very handy in helping devise trading strategies, experiment with new currency pairs and trading instruments, as well as help with the familiarization of various trading platforms. However, their continued usage can develop into an unhealthy substitute for live trading. Traders are best served when demo accounts are an adjunct to their trading, and not the main concentration. We will focus on the positive features, for which there are many.
All traders should apprentice and hone their skills on demo accounts. Live account holders should always have a demo account “on the side,” to be used for testing new ideas, or to relieve boredom when the markets are stagnant and/or not sending entry signals that one might not want to trade. Here are a few other reasons:
Safety in numbers. There is no monetary risk at all. This can enhance a trader’s creativity and allow them to develop new ideas and paradigms. However, the impact on the psychological state of the trader, cannot be overlooked or underestimated. Many traders take greater risks, as well as trade more frequently with demo accounts, This can lead to disaster when the trader transitions to live accounts. Moreover, the execution speed of demo accounts is generally much faster than on live accounts and traders can become used to quicker entries and exits...especially scalpers. Often times, this speed cannot be replicated with live accounts, even with the same platform or broker.
Practice makes perfect. Trading is one of those things that takes time to really become consistently profitable. Some super natural individuals can learn how to trade in a few days, but for most of us mere mortals, it normally takes years to really acquire the knowledge to do it right. Knowledge usually comes from experience. Moreover, even the smartest and most experienced needs continuous education, and re-education as the lessons learned can be forgotten all too easily. Two of the best manual traders I know-the kind that routinely make over 30% profit each month in their live accounts where capital exceeds $100,000 (not including compounding), still trade with demo accounts (plus smaller live accounts). They are constantly testing variations of trade setups and technical indicators, as well as use demos to learn the idiosyncrasies of trading other currency pairs and commodities. Their goal is to trade live accounts like demo accounts, with the same degree of emotional detachment...and to trade demo as if they were live. The goal is convergence so that the trading experience is seamless and natural. For both traders-as with most of us-the biggest hurdle we have to overcome is NOT the markets, reading the fundamentals, interpreting the technicals, or even the mechanics of trading, but our own particular psychology.
Test and retest. The market is always reminding us that nothing stays the same. Traders whom are doing well now, are likely to require readjustment to their strategies over time. Maintaining a demo account-and measuring profits and losses over longer periods-is one way to judge the success of trading methods. Indeed, this is one of the highest and best uses of demo accounts. Forex brokers seem to understand this as well. Many have changed their demo account policies to reflect ongoing use by traders whom may also have live accounts. In the past, demos were 30 day affairs, and the trader was cut off, while his or her email was inundated with sales pitches. Now, there is barely a mention of the amount of time one may use a demo. Some traders even use the demo for the charts only-FXCM’s Trading Station which has some of the best-while live trading off another platform (MT4 or MT5).
Keep the door open. Some traders will close their demo accounts when they open live accounts. When they suffer large losses or complete account blowout however, they will reopen old demo accounts or open new ones. Some of the more analytical traders whom backtest over multiyear frames, tend to keep demos open longest as well as those that test contrarian strategies and methods, or use the demos to demonstrate Expert Advisors. This is especially common with traders whom are designing their own automated trading strategies, or those whom are using trial versions of trading algorithms.
Distracting, yet helpful. Demo accounts can become a bad habit, even addictive for some folk. On balance though, they are really useful as long as the trader remembers:
There is no substitute for live trading.
Like training for combat soldiers, it must be as realistic for it to be useful.
Trade it like it’s real money and it will enure and enhance profit potential.
Treat demo losses and profits like real ones cause one day they just might be.
Trading demo means always staying in the game, even when one cannot afford to.
Maintain the trading edge by trading.