Why performance on demo accounts is different from live trading
- Written by News Company
In practice, due to the absence of a real money commitment, results that traders achieve from trading in a demo account can considerably be different from what they do during live trading. In as much as someone may perform well trading a demo account, their results in live trading will be significantly different. Generally, this is a phenomenon because when your funds are involved, a different mindset ensues.
The potentially considerable difference needs to be considered by a trader when gauging the value of a specific trading strategy or the services of a forex broker.
Execution-related differences
One of the causes of performance differences observed between live and forex trading account can be as a result of a forex broker failing to re-quote a price to a demo account trader. However, they usually re-quote live prices in actual practice. Additionally, the price feed from the broker and the dealing spread from demo trading can be different from the pricing which is available for live trading accounts.
It is also worth noting that in some cases, the broker may execute demo stop loss order precisely. However, substantial slippage may happen in a live trading environment. There are also times when a broker will fail to provide the real trading platform for demonstration. This can result in the trader requiring to learn and familiarize themselves to an entirely new platform when switching over to live trading.
Lack of monetary risk on demo account
However much you try to treat your demo account as a real one, the fact is that there is no real monetary risk involved. You may suffer a number losses on demo, but at the back of your mind, you know that your demo account can be refilled with virtual money anytime.
Even if you make so many mistakes on demo accounts, you can still be comforted by the fact that you will start all over again. This has the effect of taking away so much pressure. On the contrast, when you lose your money while trading real money can hurt your trading confidence significantly.
The temptation to commit trading sins is stronger in live trading
As a result of dealing with real monetary risk, you will heavily invest in the outcome of your trades. Consequently, the temptation to return to your poor trading habits will be strong. Just when you thought that you have finally overcome such practices, you might find out that you still commit them.
Sometimes, you may desire to prove that your live trading is more profitable than your demo trading. This can lead to new challenges such as overtrading, thus ignoring your trading plans altogether.
Liquidity gaps
Demo accounts usually publish quotes at which to trade when in the real sense, there is no market. It is usually an issue when trading major forex pairs owing to the size of the market because order sizes may sometimes be small. In some cases, orders are likely not to be filled because there is ‘no market’ at a particular point in time. These are also called liquidity gaps.
They occur when there are few people in the market influencers offering or bidding at a given instant. In real trading, such orders may not be filled at the quoted price because that a broker’s matching system would not find the right price at which to complete an order. This, therefore, results in a major difference between demo and live accounts.
Conclusion
Since demo accounts fundamentally remove the potential for emotion, it is advisable for a trader to remove it when they begin to trade live. This ought to be done away with before entering any real money trades. As you transition to live trading, accept the fact that you are bound to lose some trades, do not fight it. Instead, you ought to learn to work them and accept them as part of doing business in the forex market.
