Wednesday, June 08, 2005

Demo Trading ... a viewpoint

Just been reading one of the comments of someone using a demo account and wanted to share my views on this - please feel free to comment with your own (constructive of course)

To me demo accounts are the devil incarnate and lead the newbie to the false impression that trading is easy.

let me explain why.

On a demo account you never suffer from slippage or poor stop hits
on a demo account tou never have a real risk

the second one in the list is the most important. No matter how seriously you take your demo account it will never affect the amount of money in your pocket.

With a demo account your brain processes the information differently - it sees the big winners and ignores the losses and small winners. Your brain tells you - if i can get big winners on here then i can get it on a real account.

Of course this is far from reality. Your brain knows the difference even if you try to convince it that its the same.

The first time you place a trade - even for a mini lot, a whole different set of connections open in your brain. You have the anxiety at the beginning of a trade - fears as price does its little dance and fears that your gains will run away.

well, aint gonna harp on about this - but you know the story.

Let me tell you what demo accounts are good for

1. trying out a trading platform (which is not always good as live accounts often dont act the same)

2. system testing

and thats it.

My reccomendations for the newbie would be as follows:

Trade a demo account to grasp the basics of trading and then go live - preferably within 2 months of starting

open an account with a broker that allows you to trade small like oanda for example - there you can trade from as low as 1 dollar lots - but dont go that low

start trading with at least 1000 dollar lot - this equates to 10 cents a pip - not a lot of money but enough to help you feel something of what its like to really trade.


then you will lose some money. try out different systems, read stuff but keep trading

lose some more money

suddenly realise that its possible to blow your account just with 10c a pip.

Now open a new demo account and start to work on your own system.

you must trade any system to the letter or the testing is worthless

whe your system has made 3000 pips you may transfer to live again but still at 1k lots

when the system trading live has made 3000 pips you may trade 2k lots

and so on until you reach your desired level.

Thats my best advice after several years trading

ive noticed this and would appreciate your comments. I once worked with someone who said they would never trade live till his system worked - well he traded demo for 2 years and built a fair system that made money

he then went live and blew the account

why?

because although he was by that time a pretty good demo trader he could not trade live for toffee. The connections in his head had not been made in the real world and as such he had not evolved the emotional control that any trader needs. in effect he was a total newbie again.

this story is true and its not the first time ive seen it. This particular bloke took a further 2 years of live trading until he was in the same position again. and then he gave up (like so many do)

think on before you use a demo .....

1 comment:

duckfu said...

I agree 100%.

for example, open an account with oanda start with $100, and trade .10 lots (1000) units. This will open up the proper connection in your brain, let you emotions kick in, even if its a little bit. This is vastly superior to trading a demo account and I recommend it as the second step after trying a demo and getting the basic idea as you have suggested.