They say that knowledge is power when attempting to crack the forex market, but this actually means little unless you’re able to translate into a practical ability to trade international currency pairings.
This ultimately requires you to create a viable trading strategy, and one that has ideally been tested through a so-called “demo account”. This essentially simulates a real-time forex market environment, and one that you can trade using fake currency for a period of around six months or so.
In the case of live account trading, you’ll have to buy and sell currencies in real-time while using your hard-earned capital, introducing a corporeal element of risk and loss. In this post, we’ll compare demo and live account trading, while asking when is the best time to transition from one to the other?
Simulated vs. Real Market Differences – What You Need to Know
While a demo or forex funded account will effectively simulate real-time price movements and fluctuations, there are some differences to keep in mind when comparing simulated and live markets.
This is particularly true when it comes to execution, with brokers inclined to process demo orders instantly and smoothly at all times.
Conversely, slippage may occur in a live trading environment, primarily because spreads are dictated by market conditions and liquidity providers.
In a demo trading environment, you’ll also have the capacity to fill any volume for the given spread. Conversely, the size of the positions that you’re able to trade through live activity will be contingent on what’s currently available in the real-time market, and it’s important to keep this in mind at all times.
Similarly, real-time spreads and the extent of your position sizes may increase the corporeal cost of trading, although this may be more commonplace in less liquid securities such as stocks and precious metals.
On a final note, a broker’s data feed and price spreads for its demo accounts may vary from those provided for real money alternatives. Brokers will also have to pay fees in order to access live market quotes, while liquidity providers add further costs that must be factored in over time.
Psychological Differences and When to Make the Transition
It’s also important to consider the element of psychology when comparing demo and live markets, with this creating a fascinating component that can complicate real world trading.
For example, there’s less of a pressing need to evaluate the actual level of risk before executing a particular order, thanks largely to the use of fake currency and the fact that trades have no real-life consequences.
Conversely, real money trading may create an overt sense of fear and panic when executing orders, potentially compelling you to make rash decisions in real-time and offload assets at a loss.
Make no mistake; the key is to maintain a keen sense of discipline and determinism across both demo and live accounts, as you look to execute your carefully cultivated strategy in line with your expectations and capital holdings.
Your ability to display discipline and trust your strategy should also play a key role in determining when to transition between demo and live trading accounts.
You should also make sure that you’ve gained enough practical experience of the live forex market before committing your real money, while the widespread use of stop losses can also counter the psychological implications of corporeal trading.