Live vs Demo trading account
If you are new to trading then you may be wondering whether to start with a live trading account or a demo (practice) trading account.
A live trading account is one which will require real money to be deposited and then risked in each trade. Of course you will also be able to make real money.
A demo – or practice account will allow you to experience the mechanics of trading but without risking any actual money.
I would recommend that you start with a demo account (look at my demo trading accounts post for a list of brokers with demo accounts). These can be very useful for getting a feel for how the trading platform operates. Demo accounts will allow you to learn and understand the mechanics of placing trades. If you have never traded before then you are certain to make mistakes. There is no point in wasting money at this stage.
Demo accounts will enable you to compare different trading platform without having to go through the whole process of applying for a live account. Applying for a live account will often involve filling in a big form, with details of your financial and employment situation. You will then have to deposit real money before you can begin. Applying for a demo trading account usually involves just a very short form. Often your demo account will be activated straight away.
If you have the option of choosing the size of your account then go for something realistic. If you are only intending to put a thousand in, then choose an account size similar to this. If you pick an account size which is 10 or 100 times bigger than what you are going to be using then you won’t get a real feel for how much money you will be risking or making. If you have no option but to go for a demo account size which is vastly different to what you will really be trading then you should do some kind of conversion in your head each time you trade – in your head convert the demo trade sizes into trades of the sizes that you are likely to be placing.
After you have evaluated the various trading platforms using the free practice accounts it is worth having a go at making some real live trades. Trading live is very different from a psychological perspective to trading using a practice trading account. I’d recommend making a few very small live trades just so you can see how you handle the feeling of staking real money on the movements of your chosen financial instrument.
How do you feel when trading live? Are you nervous, confident, stressed, scarred? If you lose do you feel sad, panicky, if you win do you feel greedy and want to trade more? Think about whether you can handle or control these emotions. If you are trading live for many hours each day how will you cope? This is a time to think about whether trading is for you.
If you are placing winning trades at this stage don’t take it as a sign that you are a natural trader. You almost certainly are having some beginners luck. Whatever you do don’t base predictions of future success on one or two initial wins and then start increasing your stakes. This can be a fast road to ruin.
Once you have evaluated some trading platforms, and had a brief feel of live trading then go back to your practice accounts.
You’ll need to spend some serious time with your practice account so you can work on your strategy. Keep trading in your demo account until you are consistently profitable. Make sure that you treat your demo account as you would a real account. Don’t take risks or make bets that you would never dare to take in the real world.
Every so often it is worth going back to a live account to see how your ‘live’ results compare against your ‘demo’ results. If you are much better with the demo account then you should take time out to think why. Is is because of the emotional aspect? Are you treating your demo account as if it were a real account or are you treating it like a computer game?
Eventually when you are consistently profitable on both demo and live accounts then you can properly switch to live trading. Even at this stage demo accounts are still useful if you want to test out new strategies, or want to evaluate a new platform. Both demo and live trading accounts are tools that have slightly different purposes. If you understand the benefits of both types of accounts then you are likely to be a better (and hopefully richer) trader.