Trading in the markets through virtual money is known as demo trading while using real cash to execute trades is live trading. New investors who begin their financial industry journey are met with a lot of resistance by critics arguing whether to utilize real money or start via fake one. Amateur and professionals also resort to paper trades on some occasions to test out their strategy. In this article, we will argue the benefits and demerits of both and discuss which one is the right choice for you.
What is a demo account?
As the name indicates, a demo account is a fake place where your executions are not carried out in the exchange, and they are stopped at brokers feed. You trade on virtual money to feel how markets work before proceeding to a live one. Many brokerages allow you to tweak the initial deposit amount, leverage, account type, etc., to suit whatever strategy or EA you want to test.
Advantages and disadvantages of demo trading
Demo trading has lots of benefit for traders, all highlighted in the bullet points below:
- Understand your broker. Demo trading can help you understand your broker much better. This is especially useful if you are planning to use automated trading software for trading. The different conditions such as latency and spreads can be a significant factor in determining your EA’s success.
- Trading Strategies. You can test out your new strategies without the fear of losing any money. Try price action, indicators, and fundamental plans with the virtual portfolio. Testing your current outlook under various settings of risk management is also possible.
- No risk. A trading demo is super healthy for novice traders as they can execute and learn with no risk for their money. Many prop firms use demo accounts to evaluate people before putting them on live due to risk protocols.
- Understanding different markets. With a virtual account, you can test forex, futures, or stocks. After a careful analysis, one can choose the market that fits their taste. Many traders may perform better in one type of niche than another.
- Tracking performance. Demo accounts keep a record of your trades the same way as the live one does. By linking the virtual portfolio with a performance analyzer, you can monitor the different aspects of your trading.
Not everything about a demo account can prove to be fruitful. There are some drawbacks associated with using paper money:
- Emotions. We can’t stress the importance of having the right mindset in trading. Psychology constitutes a major portion of the success, and most traders fail as they are on a roller coaster of emotions. Trading on virtual portfolios eliminates any feelings that are prevalent while on a live account.
- Real liquidity and slippage. Demo accounts do not respect the actual liquidity of markets. Most of your trades are carried out at an exact price as soon as you click the button. In real terms, such a scenario is impossible, and there will be slippage and low liquidity.
What is a live account?
A live account in trading refers to using real money while executing trades in the markets. When you have finished testing your strategy on a demo, it’s time to put it to the test on a real portfolio. Doing so will let you withdraw actual gains in case of profits, while losing may cause you to lose your cash.
Advantages and disadvantages of live trading
Live trading possesses the following advantages over demo trading:
- The element of psychology. Trading on a real account involves actual human emotions applying psychology that constitutes a significant part of consistency. A trader can determine his actual output around feelings such as FOMO, greed, fear, anger, euphoria, and so on.
- Market conditions. There is a considerable gap in the conditions between demo and live trading. Slippage, requotes, and delays in executions are prevalent in real accounts.
- Profits. As you are not dealing with paper money anymore, all the gains you earn are available for withdrawal.
- Discipline. You will trade with a lot of discipline, knowing that you might lose your hard-earned cash.
- Performance. Testing your EA or indicators on a demo and real account may give a huge contrast. The authentic way to determine their performance is to put them through live trading.
- Learning. You will remember a loss that happens on a live account. This helps improve the overall learning process as you’ll keep your mistakes in check that you incurred during trading.
There are not many disadvantages associated with live trading. The only real drawback is that you may lose money. With every risk, there is a reward indeed as there will be profits which one can withdraw.
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Testing on live accounts with no risk
Micro accounts are offered by many brokers these days. A micro lot lowers the risk on your trades considerably as it represents the thousandth unit of a base currency. For example, a $1,000 loss on a standard account will only be $10 on a micro. These portfolios make it easy to test out your strategies, having perks of both demos and live.
Should you trade a demo?
It is not beneficial to trade on paper money considering the difference between live and demo portfolios and micro-accounts’ availability. Many beginners work on a virtual for months and even years, destroying their learning process due to unreal market conditions and no emotions involved. The only growth available in markets is by working on your craft on real accounts.