3 Negatives Of Demo Trading To Keep In Mind
As we pointed out in 5 Reasons Why Newbie Traders Should Demo Trade, there are many pros to starting your Forex career in the demo trading pits. However, some negative habits and thought processes may carry through when you begin trading real money.
This article aims to make sure you are aware of the fallbacks of a demo account and make sure you don’t develop any tendencies that could hurt your future profitability.
1. It's easy to develop bad risk management
As a child, you may have touched an object only for your hand to get burned. You didn’t know this would happen at the time, but the extreme pain felt during the moment taught you a lesson.
Unfortunately, demo trading has the drawback of letting you “play with fire” without the burn afterward. Because of this, you could pick up poor money management principles (sadly, this happens to most people).
To give you an example – Say a trader starts with a $10000 demo account, and they risk 10% per trade. Luck happens to be on their side with these positions, and the account ends up at a balance of 1 million USD.
When they rush to open a real account, it doesn’t matter how many times this trader was told to risk 2% or less. The same 10% per trade will be used because they “have everything figured out.”
Do they make that same return? No! Soon enough, they lose all their money because this trader bet too big, too often!
How can you make sure you don’t follow the same path? Write out a set of sound risk management rules that you follow to the tee, EVEN ON THE DEMO ACCOUNT. Decide on your max risk per trade, max drawdown percentage, and max portfolio risk at a given moment. And don’t break these!
2. Psychological challenges and personal flaws are suppressed
Those who make money in the markets, and those who don’t, are separated by one thing – the ability to handle emotions.
Controlling your feelings and the resulting outcomes is hard enough in life, but it is even more complicated when trading. This self-management is crucial in following a strategy to reach your full profit potential.
But why does demo trading pose a threat to this? Because it is far easier to control mental state and actions when there is no real money at risk, therefore, following a set of rules is relatively easy. It’s a different story though if you need to make trading profits to pay your mortgage (not recommended).
All of this means when a new trader switches from a demo to a live account, they are often left paralyzed or blinded by this influx of emotions.
The best way to deal with this is to reduce your risk when you first put your hard-earned money in the market. That way, you are eased into all the feelings and psychological obstacles of trading.
3. Brokerage fees may differ from real conditions
Some brokers will give you a far rosier picture of what their fees are like on a demo vs. the actual charges on a live account.
You could be left shocked at the changes in slippage, spread, and even commissions. This could have a massive effect on a scalpers profit, for example.
Most cons of demo trading stem from the fact that there are no real consequences to a trader’s actions, meaning it’s not difficult to fall into negative patterns. By following the suggestions in this article, you can avoid the downsides and still get the positives.
So if you are new to trading, I absolutely suggest you open a demo account to get started and find your feet.
May the market be with you!
Demo accounts FAQ
Yes, a newbie trader could develop poor risk management habits and won’t be exposed to the mental challenges of live trading. However, demo accounts are still valuable as long as you keep those points in mind.