Demo Trading V Live Trading – Know When You’re Ready

Demo trading isn't simply a form of trading for wimps. It's often the most and sensible approach and conservative approach when you are learning how to trade successfully.

Let me ask you this:

Watching a video of a kiss or getting kissed?

Driving Formula One in a simulation or driving your own car at 120 mph

Piloting a 787 in a simulator or landing 170 tons of the real thing in sleet, fog and wind shear?

Trading a demo Forex account or trading live when there's real money - your real money - riding on the trade?

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Since Lazy Trader readers are invariably intelligent, I bet you're starting to see a pattern.  Yes, as you may have guessed, I have some pretty strong opinions about demo trading, what it should be used for and how long it should last. Demo trading serves a critical purpose in getting your feet wet for Forex trading.  You get to become competent with the mechanics and technical aspects of reading the boards and catching triggers for trades.

  • You get comfortable with risk management and placing trades and learning what potential trades to steer clear of.
  • You get to practice the elements of your overall trading strategy or model, with intensity, and make them your own.

All very, very important. However, there comes a time when, like the pilot learning the 787, you must leave the simulator and start to get your hours in the air, in a real cockpit.

Lazy Trader Question:  When should you ditch demo trading and change over to your live Forex Trading account?

demo tradingI say you should move to your live Forex trading account in one to three months.  I recognize what I'm saying may stir up quite a bit of controversy.  I am fine with that.  When we get to the end of this discussion, see if you don't agree with my reasoning. Let me give you an example of why I feel pretty strongly that you need to move to off your demo account sooner than later.

You and your avatar are deeply involved in a video game. In hot pursue of the villain, you need to jump off a 20 story building and you and your avatar do it pretty blithely.  After all, you've done it hundreds of times before.  If you miss the rooftop 15 - 20 feet away, no big deal.  You utter a few choice curses, maybe pay a moment's respect to your avatar lying in a gooey heap on the sidewalk, and press the New Game reset. 

If it were reality, and you had to make that jump, with your real body potentially lying in a gooey heap on the sidewalk, would you be quite so blithe, so eager, knowing the true results if you failed? This is why I believe demo trading starts to not only lose its value, but become a detriment after a certain point, pretty early in the game.

I don't want you to have deeply entrenched bad trading habits that will take a long time to retrain.  There is also the serious risk of a sense of false confidence that demo trading engenders in most.  Demo trading is a simulator, nothing more. If you look at Forex trading as an interesting video game, by all means, stay with your demo account forever.

If you see Forex trading as a real and serious business in which you seek consistently excellent results, you will want to move to a live account sooner than later. 

Lazy Trader Alert:  I am not saying to load up your live trading account with your life savings and start trading hard and deep.  I am saying to dip your toes in the Forex trading pond and gradually and cautiously head for deeper trading waters.

Please be aware that the cliché of comparing Forex trading to gambling is valid.  Just like going to the casino, you should NEVER bet more than you can afford to lose - with absolutely no regrets.  This is not the place to recoup your family's fortunes on a single trade.  It is essential that you start with a very small dollar-per-trade risk.

Why do so many traders do brilliantly on a demo account and fail miserably when they move to live trading?

Smilies yellow stickers on blue backgroundHere's why. Demo trading is vastly different than live trading.  Why?  For the same reason jumping across rooftops is easy in a simulation. 

What's the difference between the simulator and real life? Your emotions are not engaged! I have seen this countless times, and it saddens me.  A strong demo trader moves to a live account, perhaps after a year or more of grandly successful demo trading, only to have his live account drained in just a few months.  These traders have simply forgotten that crucial difference that engaging emotions brings to live trading. Yes, you think you feel the thrill of victory and the agony of defeat when you trade the demo account.

Then you move to live trading on your Forex account and you discover that the emotions you felt on the demo account are pale and tepid things.  They seem like vapors and shadows, compared to the tempest of emotions that batter you while you attempt to keep the same even keel on your live account.  The real danger - most traders are unaware of the emotional attachment they have to the results on a live trade.

How often do you get sweaty palms and racing pulse when you're playing with paper money?  Yet, I hear this all the time when I talk to traders moving to live trading from their demo account.  They have come face to face with the seriousness and the reality.  Real money, your real money.

No matter how real you try to make your mental stance when demo trading, it is never real enough! You never get the same intensity as real live trading!  This is the pervasive danger of trading your demo account for too long.  You get lulled into a false sense of security, of your capabilities.  You bring the high risk behaviors you learned on the no-real-consequences demo account.  You tank.

How to avoid this pitfall?

You are probably going to love the irony of this, and you may think I'm a little ambivalent.  That's okay.

What I have proven time and again with Lazy Trader clients is this:  You must bring the same detachment to your live trades that you brought to your demo trades.  Not the same hair raising risk factor, but the emotional detachment, like you are in the simulator. Yes, I know it's extremely unlikely that you will ever be fully emotionally detached from a live trade.  You are after all human, not an android.  But with good training, you can get surprisingly close.

Lighten the Emotional Load of Live Trading:

  • trading affirmations

    Start with small trades and a low risk level.  You will likely still get the sweaty palms and racing pulse so you know it's real.

  • Acclimatize.  Let yourself get used to that level of intensity before you amp up your trades. You will have losing trades - and you will be feeling the emotional sledge hammer of seeing your live account draw down.  Your Real Money.  You just don't get that in a demo account.  Get used to it with small losses and see your risk reward strategy effectively at work.
  • Have a solid trading strategy or methodology and know it cold!  Whether you use the price action method I teach or another model in which you have a high confidence, own it in your head and heart.  Yes, this takes hard work and consistent application to get this skill in place in one to three months on your demo account.  Lazy Traders don't expect a free ride.

Let's go back to the example where you're the pilot in the 787 flight simulator.  You've conquered a lot of challenges in the simulator and now it's time for you to move to real flight time.

Hopefully, you are not jammed into a cockpit and told, "Great job in the flight simulator.You're on your own now, and Good Luck!" In reality, you would be teamed up with a flight trainer.  These are inevitably the top pilots and top mentors in the profession.  They put the final polish, the real life skills in place as they mentor the pilot who is learning a jet that is new to them.

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