Demo trading is a very popular way for would-be investors to learn how to buy and sell securities without risking their own money before they “learn the ropes.” Demo accounts are free and provide a real-time learning experience that supersedes the old-fashioned paper trading system in which traders wrote down entries and exits to test their trading methodology without risking funds.
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Demo Trading Defined
In addition to providing a platform for novices, demo trading also lets experienced investors try out a new platform before funding an account to decide if that particular platform is a good fit for them. In a nutshell, demo trading lets you conduct make-believe trades to become familiar with the ins and outs of a platform.
Demo accounts also let you experiment with a wide variety of unfamiliar financial products such as futures, forex or other derivatives. Finally, demo trading lets you test different strategies even if the type of trading is something you understand well.
Moving from demo trading to the real deal isn’t always a smooth process. In many cases when a person goes from using a demo account to using their own money, they experience losses. In some cases, there may be a series of losses causing the investor to wonder what happened.
Demo accounts may provide better execution than live trading. A demo account will normally fill a market order at the price showing on the screen while an order placed in a live market may be subject to slippage resulting in the order not being filled for the expected price.
Delays can also be a problem as well as the fact a demo account may involve trading with more “money” than your real account. In short, moving from demo trading to real trading often results in unexpected consequences.
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Making The Transition Work
The best solution to unexpected consequences is to make your demo trading experience as much like real trading as possible. Make realistic assumptions and if a bid or offer is placed and within one tick (or one cent) of the low or high, assume the order was not filled.
Account for slippage by assuming at least a one-cent slippage on high volume stocks. Set your available capital, if possible, closer to what you will have available to trade when you go live. Silly as it sounds, pretend the money is real. Try to create an emotional state as close as possible to your actual state when it’s your money at risk.
Finally, no matter how well you plan, real trading or investing will always be more emotional than pretending. Keep that in mind when you switch over. Try to get comfortable with the fact that trading real money will make you more nervous than demo trading.