One conversation that frequently appears in our Forex Workshop is the debate on the usefulness of demo trading. Some people will say that demo trading is useless because “there’s no skin in the game” or “it doesn’t really replicate live trading conditions”. Like with many aspects of trading, the answer is personal in nature. It really just “depends” on who is asking the question and what the objective is.

By using the case of a recent workshop participant, we will try to shed some light on this debate by offering at least one occasion in which demo trading might actually make sense.

What is Your Objective?

In deciding whether demo trading might be useful or not, consider this situation. A trader that is currently progressing through our workshop is reluctant to demo trade. He actually has trouble with demo accounts, and does not treat them as he would a live account. Here are his reasons for trading on real money:

  • l am trying to be as realistic as possible 
  • l want the gains and the losses to be meaningful
  • l want to experience that emotion of winning and losing 

On the surface, these reasons seem to make sense: the largest obstacle for many traders is the psychological impact of having money on the line. So if your objective is to temper your mind & body by exposing yourself to the impact of real profits & losses, demo trading won’t help you.

But the devil really is in the details: if you still don’t have a viable trading system that has a proven expectancy over large sample sizes, are you really doing yourself a favour by exposing your risk capital and your mind to Mr. Market’s moods?

I think not. My personal experience, which like many people includes a period (longer than necessary) of intense frustration (due to the lack of a viable trading model) coupled with pressure to perform (which was why I was risking real money despite knowing that my model was not yet ready). The amount of stress you can bring upon yourself in the markets is truely unimaginable and this is why I strongly suggest people to risk real money when they have had good demo results for at least 3 months.

Justification or Self-Deception?

I’m concerned when traders tell me they are unable to trade on a demo, because they can’t treat it seriously. Usually that is an  excuse and the real issue is their inability to stay calm and focus on the process. If you don’t have the discipline to test your trading model on a demo, you’re most likely focused on the money and that’s why you “seek emotion” from your trading.

It’s a form of self-deception: you’re telling yourself that risking real money is what you need in order to progress as a trader. Instead, the real desire is to make money, or gain excitement. In either case, you’re looking for trouble unless you already have a profitable trading model behind you.

How do you know? Usually the resolving question is: do you have any logical reason  to be risking real money? Do your results justify risking real money?

If the answer is “no”, the “emotional impact” of winning or losing is harmful at best, and is an enormous disadvantage in any case. You need to really stop thinking about the results and start appreciating  the process that leads to good results.

To use a metaphor: by focusing onthe emotional impact of your P&L, you’re like a guy trying to lose weight who needs to weigh himself after each meal. It’s frustrating, and it’s not by weighing yourself (i.e. the result) that will change your destiny. Want to lose weight? Exercize a little bit each day…make a sacrifice each day…take more walks…eat healthier. Change your lifestyle. That way you’ll remain on the right path forevermore.

Same thing in trading: change your habits, focus on stacking the odds and taking good trades. Let the results take care of themselves.

Over to You

Temering our mind & body is a necessary part of the process of course. Good traders use their “gut” to help them select/avoid trades and also with trade management. But this connection between rational brain and reptilian brain only makes sense if you have trained your gut in a consistent manner. That means:

  • already having a viable model in place;
  • having traded the model time after time placing “bread & butter” trades;
  • recording the reults with an independent software.

That’s how you “get a feeling” for the market that actually makes sense.

About the Author

Justin is a Forex trader and Coach. He is co-owner of www.fxrenew.com, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.