In practice - often because of the lack of a real money commitment - results achieved from trading in a demo account can differ considerably from actual live trading results. Even if a person performs extremely well trading a demo account, their results in a live account often differ considerably. In general, this phenomenon tends to arise because when your own funds are at risk, a different trading mindset often ensues than when trading with virtual money.
This potentially significant difference factor needs to be taken into account by a trader when assessing the value of a particular trading strategy or the services of a forex broker they are testing.
The primary reasons that such differences can be observed between live and demo account trading tend to fall into two main categories: execution related and trader related. Each of these categories will be discussed in greater detail in the sections below.
Execution Related Differences Between Live and Demo Accounts
The following potential causes for performance differences observed between live and demo account trading can be attributed to execution issues:
- A forex broker may never requote a price to a demo account trader, but they might often requote live prices in actual practice.
- The broker's price feed and dealing spreads for demo trading may well differ from the pricing that is provided for live trading accounts.
- The broker may execute demo stop loss orders accurately, but considerable slippage may occur in a live trading environment.
- Broker errors that sometimes arise when trading can cost a trader considerable time, effort and even money when attempting to resolve them via the broker's customer service department. Most traders would not observe or would ignore this phenomenon when demo trading.
- Sometimes a broker will not offer their real trading platform for demonstration purposes. This can mean that the trader needs to learn and acclimate to a new platform when switching to live trading
Trader Related Differences Between Live and Demo Accounts
The following potential causes for performance differences observed between live and demo account trading can be attributed to trader issues:
- A possible lack of emotional commitment when no real money is at stake may create an unrealistically positive trading environment in demo trading that is not found in live trading when the trader's account funds are actually on the line.
- A trader's failure to following their trading plan has no real consequences. As a result, a trader may develop bad discipline-related habits that can cost them money when trading live.
- Traders might be tempted to overtrade or insufficiently evaluate risk when trading in a demo account. This behavior can then have serious negative consequences when they switch to engaging in live trading.
Demo Trading Benefits
Trading virtual money removes the psychological element from trading, so for this reason, it cannot accurately assess a person's trading abilities. Nevertheless, virtual trading can have great benefits when testing the performance of a trade plan and also for trader education purposes.
When used as an educational tool, a forex demo account gives novices a risk-free start to trading in the forex market. In addition, strategies can be put to the test without assuming any risk, all in real time trading situations.
Overall, trading in a demo account offers a great service to novices that would otherwise have to learn using, and probably losing, real money. While the emotional rush of risking real money while trading may be lacking in demo trading, trading a demo account allows you to learn to watch the market closely and can help you get a better feel for how the forex market operates without putting any real cash on the line.
Consider Using a Micro Account Instead of Demo Account
To get around some of the aforementioned causes of performance differences between live and demo account, some traders have chosen to open micro or mini accounts with a forex broker, using a small amount of funds rather than funding their entire trading account right away.
This strategy allows them to test out the forex broker or trading strategies in a live trading environment, while not putting their primary account funds at risk of loss.
