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Guest Commentary: How to make your demo account a bit more real

Guest Commentary: How to make your demo account a bit more real

2012-10-05 22:30:00
Yohay Elam: Forex Crunch,
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A forex demo account is an excellent tool for getting familiar with trading, technical analysis, the software and more. However, a demo account has some limitations.

Among the many limitations, a demo account cannot simulate the feeling you have when you have an open trade. You will not encounter the same stress or excitement when it isn’t real money. This article focuses on another aspect: the sum of money in your demo account.

A reader recently mentioned his bitter experience with a big forex account: he had $100,000 in this account and he quickly grew it to $140,000. Very nice, but not so real. It can be easily assumed that the average retail trader doesn’t open an account with such big funds. When this reader got back to trading in his real account, the result was disastrous – the account was liquidated.

There could be many explanations apart from the emotional difference: he continued trading with bigger sums, the system didn’t work well with lower sums (that sometimes mean lower spreads) or any other reason.

But let’s focus on what you can do to encounter this limitation:

One option is to limit your account to the real amount of money you intend to deposit: By having a demo account of only $10,000, $5000 or whatever sum you genuinely intend to deposit, you will gain a better simulation of a real trade.

Another option is to trade as if the demo account is smaller: if a smaller demo account is not feasible, treat your account as if it had only the sum you intend to deposit, and measure your success according to this sum. Just ignore the rest.

You will gain these benefits:

  • The profit you will make will not blind your eyes: even if the aforementioned trader is capable of making 40% in a real account, the sudden profit of $40,000 in the demo account had a strong effect, that could trigger euphoria and over-confidence. By making $2,000 on a $5,000 account, this sensation would have been weaker.
  • Spreads would have been more real: Perhaps your system depends on making quick profits from small movements – such a system requires tight spreads, and these aren’t always available for lower sums.
  • Getting used to the real numbers: By matching the size of the demo and real accounts, there will be no room for confusion when moving to a real account: it will be unlikely that you’ll trade with higher positions. In addition, you will also be familiar with the number of dollars that every pip corresponds to. When the sums are different, you will need to take your time to adapt.

In general, a better preparation means better chances of profiting.

What do you think? How do you deal with demo accounts?

Further reading: 5 Most Predictable Currency Pairs

By Yohay Elam, ForexCrunch

Would you like to see more third-party contributors on DailyFX? For questions and comments, please send them to research@dailyfx.com

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