Demo Trading Account – Should I Use It?

July 14, 2009 by  
Filed under Trading Tips

It is almost seems naturally to “learn” trading by using Demo Trading Account, however, most do not know this can eliminate their chance to success in the markets.
You choose to trade Forex, Futures, Stocks or Options and the first thing come across your mind is “I should practice before I risk my hard-earned money, so I’ll read a little, practice with Demo trading Account till I find myself profitable consistently and then move forward to live account, simple right? ” – WRONG!!

Demo Account should be used to practice trading platforms and nothing else.

Simulated trading seems to be very real and real-life like, but it does not simulate the most important matters; ‘Your Mindset’, ‘Slippage’, ‘Partial Fill’ and ‘No Fill’.
By avoiding all of these matters, you are adopting very bad trading habits, developing useless trading strategy at best and losing strategy at worth
and last but not least – you learn to trade a market that does not exist.

Let me try and expand it by explaining each matter :

1. ‘Your Mindset’ – Your mind it the actual “enemy” you are trading against, most likely it will fail you more than any other traders.
Demo Trading do not involve thrill, fear, greed and other emotions that any trader experience in real trading, and therefore your mindset
and judgment will be ‘cold’ and ‘calculated’, which means you will not encounter real trading difficulties.
By avoiding real trading environment and emotions you are training your self to a different ‘battle zone’ then the one you are going to send yourself to.

2.’Slippage’ – This is what we call for trade execution that has been filled with a different price then you wanted, most Demo Account
do not try to simulate this and filled you order with the current price of the market, and if the Demo try to compensate it it will never be the same as real trading.

3.’Partial Fill’ – At reality, you will not get filled for any number of Lots/Contracts/Stocks due to demand and supply while Demo Trading will allow you to sell or buy
big orders with ease. You can develop a strategy which you trade 4 lots at a time, but in real market you will be able to trade only 1-2 lots at a time due to lack of liquidity or other reasons.

4. ‘No Fill’ – Live trading using time stamps for orders execution, first order to be arrived to the Exchange is the one to be executed first (at the same price, and considering all orders are “market orders”..), this method make sense but also create situations where your order is waiting at the exchange for execution, but not executed since there were not enough orders at the same price and the market moved.
for example, you bought XYZ for 34$, and want to sell it at 34.5$, price climb in your favor and reach 34.5$, trades executed and when your order ‘turn’ to be traded arrived, no ‘Buy’ orders left and no one want to buy XYZ for 34.5$ at the moment, the price start to go lower.
Demo account will fill your order at the moment the price will touch 34.5$, or if it is sophisticated system, your order will be attached to live order and will be executed when the live order will, this is very close to reality, but it is not reality.