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Why Demo Account Performance Is Often Better Than Real Account Performance?

Discussion in 'Forex Articles' started by wcforex, Oct 5, 2007.

  1. wcforex

    wcforex Recruit

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    Over the past several years, the popularity of online currency trading has grown substantially. Each day, online FX brokerage firms attract new investors - each of them lining up with a glint in their eye, lured in by promises of easy money. Most of these companies allow you to sign up for a free demo account which lets you place mock trades using their trading platform to get a feel for the excitement of currency trading. In the casual world of free demo accounts - many young traders find they are able to garner impressive profits without a significant amount of effort. It almost seems too good to be true. But transferring this success from a demo account to a real account is far less common. Why is this? The actual trading platform behaves the exact same way, the market doesn't care whether you're a demo or real trader - so what is different? It's you who has changed. Not your personality, not even your trading style - but the factors that affect you are different.

    What is the key factor to trading success?

    The search for the "Holy Grail" of trading has been a common theme throughout the history of markets. There are a variety of different techniques. Those whom are inclined towards number crunching and pattern recognition may prefer technical analysis, whereas those more focused on the big picture, logical macro perspective prefer fundamental analysis. Then there are specific methodologies like swing trading, trend following or even more esoteric ideas like the Elliot Wave theory. Which one is best? There are examples of very successful traders using each methodology.

    Since most new traders lose money - perhaps the more appropriate question to ask is, "What is the key factor to trading failure?"

    Greed and Fear

    Trading is an atmosphere rich in the porous emotions of greed and fear. The current price of a given security or financial instrument at any point in time can be thought of as the confluence of greed (bulls) and fear (bears). These two emotions make up the core of humanity itself. When market information is released, trading can be a high intensity experience. Sensing danger, your body releases adrenaline that acts to accentuate both your greed (fight) and your fear (flight). Because these emotions are so strong, they can cause you to act irrationally, ignore your system, stated set of rules or trading plan and to act upon impulse. Indeed, this is a genetically programmed response - but it is often also the trader's downfall, especially when he's playing with much better capitalized, more sophisticated and experienced foes that know how to manipulate those emotions.

    When you are a trader - you are always under the influence of at least one of these two emotions, even if you don't have any trades on.

    Impact of fear and greed on your trading

    If the market's going up and you're in - greed is telling you to buy more and fear is telling you to take your profits while you still can. If it's going down, fear of being wrong makes you hold onto a losing position - and then greed sometimes convinces you to "average down" your position (and buy more) so it'll be easier for you to come back.

    If the market's going up and you're not invested - fear is telling you that you're missing out on easy money but it's your greed that causes you to get in just after the greatest increase (just when its about to reverse course). If the market's going down and you're not invested - greed is telling you to get in as the price is cheap, while fear reminds you that you'll miss out on this opportunity if you don't act quickly.

    Perhaps if we just felt greed, or just felt fear we would be able to control our emotions a little better. But when both of these little devils whisper into our ears at the same time - it is often impossible not to listen.

    The Thrill of Greed

    The first time you try FX trading - you will feel the thrill of greed. It is an ecstatic experience, your brain flush with neurotransmitters and your mind giddy with visions of untold riches about to be reaped. Greed is bold, aggressive and incredibly exciting. It can take hold of you both mentally and physically. Just imagine the possibilities!

    This greed is what draws us into FX trading in the first place - the dream of easy money and 100:1 or 200:1 margin rates. It inspires us and causes us to forego rational thinking in favour of reckless abandon.

    In the movie Wall Street, Gordon Gecko says, "Greed is good", but it is also very dangerous - especially if you are unable to recognize when greed is the one doing the talking. Greed is also one of the most common techniques used to manipulate people. Every get rich quick scheme, promising untold riches for no money down takes advantage of your natural predisposition to throw all logic and sense out the window when greed pays a visit. The argument starts to appear very compelling and you ignore what would otherwise be clear warning signs. Like drunk goggles, greed can mislead you and when you eventually wake up you are often in a very precarious position.

    The Fear of Losing

    Fear can be equally as dangerous. The most potent and easily manipulated form of fear is your fear of admitting that you are wrong. Fear of having your precious ego bruised. This fear can cause people to do incredibly stupid things. The funny thing about this world is that everyone thinks that they are right. Most people would rather lose thousands of dollars than admit they are wrong. It is easy to feel ashamed of trading losses and live in denial but this is self-destructive behaviour. By denying the problem exists, you fail to take steps address it and only ensure that it will continue in the future.

    Demo Trading

    Demo trading is a great way to get started in foreign exchange trading. It is identical to real trading, except that you're using "pretend" money. Demo trading allows you to get a taste for what type of events move markets and how they move. It encourages you to learn more about geopolitics, macroeconomics and global finance and these are all incredibly positive things.

    Demo trading also introduces you to the rapture of greed. Trading is a means to one of the purest, most raw and potent forms of greed. The whole point of trading is to make money and the more money you make - the stronger the pull of your greed becomes. It is intoxicating and can take complete control of you.

    But demo trading does not introduce you to fear. There is no fear when you are demo trading. It is like you have a perpetual get out of jail free card. If you start losing badly on a demo account - simply start a new one. There is no accountability for your trading failures and only recognition of your trading success.

    So your demo account does not teach you how to handle the emotion of fear. This emotion is most likely going to lead to your downfall. Greed may get you overextended, but fear will stop you from cutting your losses. You may think that fear of losing money would cause you to cut your losses, but the stronger emotion is fear of being wrong and that causes you to hold on to your losing position - until it's all gone.

    There is also the issue of account size. Many demo accounts give you $50,000 to play with. This type of capitalization allows you to buy 5 lots (500K) of EURUSD pretty easily. If goes up 20 pips you've made $1000. Nice one. But when you open your real account - it's more likely that you put $5000 or $10000 in there to begin with. Now you're dealing with a 50K lot, which means you'll take $100 out of a 20-pip movement. But mentally you are used to getting $1000 for that movement so you usually end up risking more. Next thing you know - your 200K position has turned against you 50 pips and you've lost $1000. That's real money you just lost. You can't just start another account.

    The capitalization of the demo account is sufficient to sustain losses and still come out on top. But your real account is likely to be undercapitalized and if you're trying to achieve returns similar to what you got on your demo account - you are going to blow up very quickly.

    Being honest with yourself

    Ultimately, while providing an excellent introduction to FX trading - demo accounts do not accurately predict whether you'll be successful trading real money. Markets are dominated by psychology and often go against what fundamental logic or technical indicators suggest should happen. The single most critical factor in your trading success will be your ability to control your emotions of greed and fear. These emotions cloud your judgment and cause you to trade recklessly. Demo accounts introduce you to the emotion of greed, but by their very nature they are risk free and therefore there is no fear involved. They are also likely to be better capitalized than your real money account, which misleads you with respect to the amount of returns you can expect to earn.

    For all of these reasons, demo accounts allow you to avoid being honest with yourself and this is perhaps the most important factor of all. You need to know your edge and your limits and in order to know these - you must be honest with yourself.

    This being said, demo accounts are still very entertaining and educational and I highly recommend opening one to anyone who's interested in getting a taste of the exciting world of FX trading. It's a great way to learn more about economics, global politics and yourself.

    Happy Trading :)
     
    ForexVerified likes this.
  2. Bryanstation

    Bryanstation Recruit

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    Good article!

    wcforex -

    Nice article, thanks for posting. I think there is a huge psychological connection between a demo account and the real thing. Brokers love to show off their demo accounts and give you large amounts of play money - but like this article said - it does not teach you anything about fear, you are still protected from an actual loss. What they should offer is insurance that you can purchase when you have your first realy live trade. Insurance that will cover a certain percentage of your loss. This way, if you do loose, it still causes fear because you really are loosing your money - but that eventually will be overriden knowing that you will get some of it back. But its that temporary feeling of fear that will help to train the beginning trader to trade better.
     
  3. Dealgone

    Dealgone Private

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    I would sticky this

    There is a big difference in demo trading and real trading. Psychology is at least 80% of trading.

    I recommend to demo trade on an account basis that equal to the real account as much as possible.

    Also I would never put any money in my real account that I can not afford to lose. So the pressure is still there but I know when I blow the account I still have another sources to gain money. :)
     
  4. JeffNLisa

    JeffNLisa Private

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    Does the broker make more money when you lose?

    I have heard the expression "trading against you" applied to some brokers, and since I don't understand what that actually is, I don't know how it can hurt you.

    My understanding of brokers is that they make money on the spread and/or the commission, so they make their money when you open and close a position, whether it's a winner or a loser. If that's the case, then the only way I could see it in their favor for you to lose is if they could somehow entice you to enter and exit a larger number of positions by tricking you than you otherwise would by trading correctly.

    And even if that were true, certainly some brokers understand about shearing a sheep vs. skinning it. If they only make money by your trading (regardless of your profit or loss), then if they can help you profit, you'll still be there tomorrow trading.

    So if they only make money by your trades, and see it's in their best interests for you to profit, then I could see them wanting to do something like that insurance idea, to help newbies bridge the gap from demo account to real.

    Also, something they could easily do that would cost them nothing, is to offer demo accounts with $250 or $500 balance. That way, if that's all a person has to open their real account, they can learn in figures the same size as the ones they'll see for real.

    Of course a person can use the $10k demo account, but open positions only as large as they will with a $400 account. But that requires a discipline that most people honestly don't have.

    And if the demo account is only $500, a person might not get excited enough about $10 profits to even continue. I guess that would explain why brokers only offer $10k demo accounts, because the enticement of $1000 demo profits probably does get a lot more people to open the smaller real acocunts.

    Jeff
     
  5. Dealgone

    Dealgone Private

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    On Oanda I had first as default 100k on the demo account but I adjusted it to 10k to be more realistic.

    So why they simply don't ask when you create the demo account how big the real account will be?

    Is it so difficult to explain to people when they crate the demo account that it is crucial to know how big the account should be?
     
  6. GTOtrader

    GTOtrader Recruit

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    there is no way that you can take the demo account as a real account because you know in the back of your head its not real money. so when you start trading live it makes it harder to jump into trades because of the fear of losing, but losing is part of the game. you cannot win them all.... as long as you win more than you lose, you are a winner. and as you keep gettin experience you will have many more winners than losers.
     
  7. vidigix

    vidigix Private

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    I whole-Heartedly agree with this article.;)
     
  8. digforpips

    digforpips Private

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    Simply put...you do better on a demo account because you don't care. psychology is everything. You can trade a demo account completely objectively because there is no real risk or reward. No risk no reward equates to no risk of fear or greed. Trade real money even if its just a little bit. It's a compleely different feel. I agree with the article.
     
  9. george soros

    george soros Private

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    One of the other issues that doesn't appear to have been mentioned is that demo accounts always allow you to trade at the prevailing prices whereas in 'real' accounts the brokers do what they can to scupper the trade and give you the worst deal. This means slippage is the order of the day or even non-fills.
    Why do you think so many brokers offer free software, free demo accounts and the enticement of 'free' money ? Simply because once they have your money they'll do their damndest (is that a word ?) to stop you getting it back.
    Look carfeully before you open an account. Personally I use IB and operate using a great piece of one-click software called Button Trader (just Google it) to get me in and out quickly. I trade news, although not spikes and for me this combination works well.
    Have fun.
     
  10. Froso@FXNET

    Froso@FXNET FxNet.com Representative

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    So far i also felt that my demo account result is better than real account , even when i am using EA for automatic trading , using same strategies and using equal capital but in fact the real not going same result as trial in demo account , maybe there some factor that make different such as slippage , re-quote , fast execution and other . So we must always be careful
     

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