Today we will discuss why your results in your demo account will
probably contrast sharply with the results in your live account. When
most people start trading, they believe their results trading with fake
money will be the same as their results trading with real money. Of
course, that is almost never the case. The reason for this is that a
person's emotions greatly impact their decision making ability when
real money is on the line. We will go over why this is, and we will go
over some tips for blurring the line between demo accounts and live
accounts.
First off, I want to point out that I am not slamming demo trading.
Trading a demo is how everyone should learn the basic mechanics of the
trading platform. It also allows people to practice following their
strategy and practice entering orders. If a trader goes in a slump, it
can be effective to switch to the demo for a while. When a trader is
in a slump, their brain is so focused on the money they are losing that
they make mistakes left and right. Switching to demo relieves this
pressure and reminds the trader that they still know how to trade
well. The demo is also good for working on new strategies without
risking money. However, the demo results usually do not translate to
live money results.
To begin with, there is one basic reason the demo seems "easier" to
trade. The reason is that you can have your fake cash refilled at any
time. Therefore, what is the risk? There is no risk. If you screw
up, then you can start over without any penalty. This takes a
tremendous amount of pressure off of you. You could blow out 5
accounts and win big on one, but that doesn't mean you will ever be
able to repeat that one big winning account again.
Let's say we have moved passed the obvious reason above that the
demo isn't a 100% forecaster of live results. Let's say that you have
some idea what you are doing, utilize proper risk management, have a
strategy that gives you an edge, and have attained consistent results
on your demo. The reality is that it is much easier to follow those
guidelines when there is no real money involved. A trader's emotions
are much stronger when trading with real money than on the demo. If
you don't believe me, I doubt you have traded real money for very
long. With real money you will be tempted to commit a number of
trading sins: moving your stop farther away from the entry, exiting a
position before it hits your profit targets, entering a trade that
doesn't fulfill your criteria to get "revenge" after a prior loss,
etc. I could go on forever with these mistakes, and you probably have
plenty of your own that you could list.
So how do you make your results with real money resemble your
results on the demo account? The first is to start trading with small
positions of real money. Do not jump straight into risking what you
think you should normally risk. If you are trading very small
positions, you will not devastate your account, but you will learn what
mistakes you are prone to when you switch to live money. Even though you may
be risking small amounts of money on each trade, your brain will work
very differently than when you are operating on the demo.
Once you start making mistakes with real money as described above,
take notes on what happened. Write down the mistake, what your mindset
was, why you did what you did, and why what you did was wrong. The
next step is to write down a solution to this problem. This will allow
you to had valuable "rules" to your trading plan that will help protect
you from your own emotions. In my opinion it is difficult (if not
impossible) to correct these mistakes before you actually feel the pain
of losing real money due to the mistake (even if it is a small amount
risked on each trade).
Continue this process until you become more consistent in following
your plan. Of course, you will never eliminate new mistakes entirely,
but this process will help you become much more consistent in actually
following your plan and not deviating from your strategy. This may be
a brief explanation of how to bridge the gap between live and demo
accounts, but I want to reemphasize how important it is to start by
risking very small amounts of real money. Don't trade the demo forever
because there is only a certain level of expertise you can gain from
the demo. Trade the demo until you have a basic trading plan (with a
strategy and money management) that you feel comfortable executing. At
that point, trade small positions of real money and you will be able to
improve your trading skills much more quickly than if you only used the
demo for months and months.
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