Personally, I think that trading with demo accounts gives you a false level of security. Your results via a demo account will probably contrast sharply with your results in your live account.
When most of the people start trading, they believe that their results trading with fake money will be the same as their results trading with the real money. Of course, that is almost never the case. The reason for this is that person emotions significantly impact their decision making ability when real money is on the line.
Firstly, I wanted to make it clear that I am not dropping demo trading. Trading a demo is how everybody should learn the basic technicians of the trading platform.
It also allows people to practice following their strategy and practice entering orders, placing stops and limits, etc. If you run into a bad spell with your trading. Sometimes returning trading and getting confidence back using a demo account for a while can be the right thing to do. When you get into the bad patch trading, the brain is focused on money that is being lost, and mistakes can be made left right and center. Switching to a demo account relieves this pressure and reminds you that you can still trade well. The demo account is good for working on new strategies without risking money. However, the demo account results usually do not translate to live money results.
To begin with, there is one fundamental reason that the demo account seems easier to trade. The reason is that you can have your fake money refilled at any time. Therefore, what is the risk? There is no risk. If you screw up, then you can start over again without any fine. It takes a huge amount of pressure off of you. You could blow out 5 accounts and have one huge winning account, but that does not mean that you will be able to repeat the one big winning account again. It is the first phase of the demo account to recognize, but there are far more important factors than this.
Let me assume now we are moved passed the simple reason above, i.e., the demo account is not a 100% forecaster of live results. Let say that you have some idea of what you are doing and what you are using for proper RISK MANAGEMENT, you have a strategy that gives you an edge, and you have accomplished consistent results on your demo account. The reality is that it is much easier to follow those guidelines when there is no real money involved. The trader emotions are much, and much stronger when trading with real money rather than a demo account.
With Actual money you will be tempted to commit some trading sins:
- Moving your stop further away from the entry level.
- Exiting a position way before it reaches your profit targets.
- Entering a trade that does not meet your trading rules maybe to get revenge on a previous trade that was a bad trade.
There is a number more that I could list be these are the main ones. It begs the question how do you make your results with real money resemble your results on the demo account?
- You start off trading with a small position size.
- Do not jump straight into risking your full RISK TOLERANCE per trade.
- If you are trading small positions, you will not desolate your account, but you will learn very quickly when you move to live positions.
- Even though you may be trading small positions and limiting risk on each trade to small amounts, your brain will work adversely than when you were operating on the demo account.
Once you start making the mistakes with real money, you must take notes and learn. Write down the solution and remember it so that it does not happen again. These will affect the rules that get added to your TRADING PLAN.
You must continue to grow as a trader until you become more consistent in following your plan. It would require someone similar to a saint to eliminate new mistakes entirely completely, but this process will help you as a trader become more and more consistent in actually following your plan and not deviating away from your strategy.
It is a very brief explanation of bridging the gap between a demo account and a live account. My best advice is always to trade with smaller positions.
Do not trade the demo account forever because there is so much expertise that can be obtained from the demo account. The best plan is to trade your demo account till you have a basic TRADING PLAN with good MONEY MANAGEMENT and RISK TOLERANCE levels built in and that you feel comfortable trading with. At that point, small trade positions of real money and you will be able to develop your trading skills much faster than if you only used the demo account for months and months.