It is no secret that traders of all proficiency levels use demo accounts in order to sharpen their swords. Entering a real money trading environment without practice spells for trouble, after all. Most seasoned traders will always recommend using a demo account to get to grips with many of the demands of trading, and for good purpose.
While there are packages an investor can purchase to test themselves, there are also things such as a free binary options demo account provided to those interested in trading. This is the first step for many towards opening a live account and converting their hours of practice into an environment where they can build significant profit. Is it that simple? The answer is rarely yes.
There is no established system to adhere to where success in a demo environment equates to profit in a live environment. This is because of the psychological factors which are mostly absent from a demo trading environment.
So what are these factors?
The relationship between money and emotion
Emotion is a major factor which can influence our decisions and drive our choices. When it comes to money, emotion is inextricably linked to emotion. Although a trader learns with time to compensate for the arrival of unwanted emotions by sticking to a strategy or plan, those making the move from a demo account to investing with their money will be at a disadvantage.
This is not something you can learn by using a practice or demo account. The pressures and moments of vulnerability which occur when faced with making a decision are not something we know how to handle until we have been in that situation before. There is no substitute for experience, so do not expect to rock up and roll out that easy.
No real losses with a demo account
It is a comprehensive simulation, but not one where a trader will sweat over losing 75% of their capital. In fact, there will be little to no effect on the trader’s mood as they can simply recharge their balance or open a new account. Losing $30,000 on a demo account vs. losing $3,000 on a live account? Which would you choose?
There is a pretty wide margin to make major mistakes on a demo account, but when it comes to a live account environment, risks have serious consequences. Consequences amount to money.
No scope for bad habits
When you are in a live account environment, losing money will invoke real reactions which can lead to desperation. This is not something which can be learned by simply using a practice or demo account. When you see money leaving your balance and a series of trades not working out, you may be tempted to move stop losses and committing cardinal sins such as revenge trading.
When it comes to being a winner in a demo environment and successful when trading with real money, there is a significant difference. As such, there is no way to draw a comparison between the two. That is not to say that a demo account is not useful – far from it – but understanding the psychological differences between both will prepare you for life in a live trading environment.
Disclaimer: This content does not necessarily represent the views of IWB.