The importance of creating a practice trading demo account
Most beginners lose money at the start of their trading journey.
Heck, even I lost about 60% of my account at the beginning.
It’s not fun to lose money, and obviously you won’t see many that will admit of losing their money. People like to brag about success and to keep their losses to themselves.
As the saying – A success has many parents, but a failure is always orphaned.
Trading is NOT intuition-guided
You might have an intuition about an asset, buy it and it will rise in price. Then, psychological speaking – you will assume you have an incredible talent in picking up opportunities in the financial markets.
This is the worse that can happen. For 2 main reasons:
- Statistically you will guess right on about 50% of the times. Meaning it’s like you gamble on “heads” when flipping a coin, and it does land on “heads”. You will not think that you have an ability to forecast how the next flip of coin will land, right? Yet many will assume they can when it’s trading related. Only difference – in trading you lose much more.
- Even if you got the direction right – when will you close the position and monetize the your profit? Once again, intuition is your worse enemy. Imagine the price keeps going up, and you say to yourself “I’ll know when to exit the position. Once the price stops from rising.” And it’s a good idea, on theory only. Because you know when the price stops only in hindsight. Never on real time. Never. You’ll understand more about this matter once you start trading.
What are the differences between the demo and real accounts?
There are many differences. When you’re paper trading you don’t really pay attention to:
- Money management, and because it’s not real money, its ignored.
- Margins required to take positions which differ from position to position. This can affect money management.
- Risk management is also different. Risk management is not punctilious, not precise.
- Mark to market losses can make your portfolio looks bumpy, lopsided, and generally bad. In real-world trading, this is the first thing that is observed and it affects the total NAV of the portfolio. When you are trading with a demo account as the simulator, it doesn’t matter because you’re looking at the end result only.
- Stop losses are based on the past. Usually, stop losses are triggered because the order book is exposed to institutions and large traders and they get full access.
On real account, you don’t have that magical help and nothing will help you to make money in some easy way.
A demo account is a live simulation. So it mimics live prices very closely. They do have a slight difference at some points in price as well.
Paper trading executes one goal, to teach you to learn how to properly execute trades as they say and test strategies without risking real money. Paper trade is advisable until you learn enough to execute trades without making mistakes. These mistakes will cost you money and you have to learn how to avoid them. The lack of a demo account is that paper trading does not develop your trading mindset because there is no real money at risk.
What is the biggest problem of demo accounts?
The simulations, in short.
The aspects of supply/demand cannot be simulated entirely because the order flow from the demo account itself would influence the market. It’s clear.
A demo platform publishes a quote at which to trade when in fact there is no market. It’s usually not a problem when trading major Forex pairs owing to the size of the market and because retail order sizes are usually relatively small. There are cases in some instruments where an order cannot be filled because there is “no market” at a given point in time. These are known as liquidity gaps and this can happen when the market is adjusting to an important breaking event. This causes the price to “gap” a certain distance.
In real trading, an order like this, would not be filled at the quoted price because the broker’s matching system would find that there was no price to take and complete the order.
In simulated trading, the order would be filled anyway, even when the price fell through a liquidity gap.
When choosing a demo account you should choose the one closest to the account you plan to trade with. It doesn’t make much sense to use a $100,000 demo account that trades standard lots when the one you plan to use will be a EUR 250 micro account.
But you can still use such a demo account.
But be aware, if you trade with big cash on your practice account, this can give you an unrealistic sense of your margin for error.
It’s not perfect, but it is a necessary