“How Long Should I Demo Trade?” is a question that comes up often on these forums from new traders. Every time it is asked there is a discussion between the two primary camps about what is appropriate and what is not. As someone that has been fascinated by and interested in general psychology for most of my life- I thought I would attempt to address this question in a mini-article of sorts. Let’s first look at the two primary camps of opinions on the matter. You’ll find that most opinions in the threads are some variants of these two.
[B]1. The Two Camps[/B]
A. “Trade demo for a long time” (6+ months)
These folks typically view constant practice as the key to success. The more you repeat a process successfully, the more confident you will get in the process. Thus, you spend an extensive amount of time in a demo account repeating and honing your strategy until you are building profit. The trader should then be able to transition to a live account and build profit there using the exact same methodology they employed in demo.
B. “Don’t trade demo for long” (less than 2 months)
This camp feels it’s better to trade on a demo for as long as it takes to get used to the trading platform and understand your strategy. They feel it is better to open up a micro-account and trade in very small amounts of money live so that way you get used to dealing with the psychological impact of putting your money out in the market and letting it do what it’s going to do. The thought process is that you have no emotional investment in the fake money provided on a demo- thus you’re not accurately recreating the psychological stresses of trading through demo trading. You can instead ease into it like you would a hot bath.
What many of these discussions completely miss the point of is the psychology of the person asking the question. Advice is provided based on the contributor’s personal experience as opposed to what they know about the person asking. Neither answer is right or wrong. It all depends on the asker.
[B]2. “I was profitable on Demo but blew out my live account”[/B]
I can’t tell you how many times I’ve seen this mentioned on Babypips and other sites. I firmly believe that the reason is the trader is not psychologically prepared to trade with the amount of money they are trying to trade with. It is mechanically very easy to trade Forex. The difficult part is mastering all the psychological and emotional problems that can explode in your face. They assume that since they were successful in Demo, they will make the transition. It’s an entirely different ball game once you’re putting your actual money out in the market.
I think that a major contributor is a false sense of security that a profitable demo account provides. It’s easy to equate the two if you’re just looking at trading screens without really exploring everything that is going on in the mind of the trader. And others don’t understand how different it can be to trade Live since they haven’t done it yet.
[B]3. Evaluating Yourself[/B]
To find the right answer- you’re going to need to do an assessment of yourself. Not every point will be appropriate for each person. Just throwing some things out there to try and get your mind on the right track.
A. Ever been mugged or robbed? One minute your life is placid; and the next you have your property stripped from you by forces you have no control over. How long did it take you to get over that experience? Did you ruminate on it for months? Or were you able to shrug it off, say “crap happens”, and move on relatively soon? You should never be in a position in the market where you can lose everything on a single trade. But there is always the very real possibility that some major institution dumps a bunch of currency and sends your position straight into the crapper.
A person that was able to brush off an experience like the above will have little problem with the psychological stresses of trading.
B. Are you a big picture thinker or tend to focus on smaller things? If you take every successful trade as a personal victory and every failed trade as a major blow; you’re in for a long haul. That trade is only one you’ll make of thousands. In the big picture- it means next to nothing. There’s nothing wrong with taking a moment to pat yourself on the back or get frustrated by a loss. The important thing is that it doesn’t affect you for very long. If it does; you have to work to accommodate or change that.
Big picture thinkers are going to be less likely to spend time dwelling on individual trades, thus they are in a good position to make the demo-to-live transition.
C. How emotionally attached are you to your money? Are you able to treat your trading balance as though it is already gone? Or are you in a “I need this” sort of situation? I’ve seen a number of posters come on the boards and talk about how they are trying this out as a new career option because they’re between jobs or are facing a major life change. Those people are setting themselves up for failure because they won’t be trading with a clear mind. They’re too emotionally invested in their money at a time when a major life change is hitting them.
A person too emotionally attached to their money is likely to have a harder time making the transition to live. They are likely to end up over-trading, revenge trading, or micro-managing their trades into failure.
A. The type of person that will benefit the most from a long-term demo account is going to be someone who is comfortable with their money and potential loss. The person will likely be able to shrug off losses and move on within short order. Emotion won’t be a major part of their decision making processes. This type of person will make a smoother transition because the stress will not weight as heavily on their minds as a person who is more emotional.
This type of person would be able to go with a short-term demo account as well with the same/better results.
B. Humans are emotional creatures by nature. A short-term demo account into a micro-account is an excellent way to begin preparing for the psychological shift required to trade. The trader is taking baby-steps as opposed to trying to make giant leaps across psychological barriers. That rarely ever works in any avenue where psychology plays a major role because you have to accommodate the individual. A jolt may get someone on the right path; but it won’t build future success. That is why easing into any new situation is far more effective. The same is true for trading.
[B]5. Why Should I Listen To You?[/B]
You don’t have to and I’m not saying you should. This is my opinion based on what I’ve learned about psychology in my life, experience making the transition myself, and reading numerous posts on the subject matter here on these boards. Neither way is necessarily “wrong”; but I believe that with the general way the human mind works- easing into it is going to be a safer, more effective method of transition than jumping straight in after Demo’ing for awhile. My opinion is that a person should not spend any longer than it takes to learn the platform and understand their strategy before jumping into a micro-account ($150-$200ish) and trading spare change per pip.
To newbies reading this, always remember-
Always start small. There’s no reason to open your first Live account with over $500.
Many people blow out their first account (or two) after successfully Demo trading.
Emotion in trading is your enemy. Do everything you can to control or eliminate it.