Getting Ready To Deal In Currency Live

May 1st, 2009 | educational | forex educational

When you are sufficiently comfortable using your demo forex – that is, you understand the numbers shown by the terminal, you can make trades and not make mistakes such as buying when you wanted to sell, and, most importantly, you know how to use stops, it is time to try trading with real money. There is not much value in getting superb profits in the demo, because real forex is quite different from it.

The demo is only a simulation, a computer game. Getting a top high score in Formula 1 at your local arcade wouldn’t help you beat Michael Schumacher to the finish line in Monaco. By analogy, most people that spend a lot of time playing with fake money, winning contests, and developing elaborate day trading strategies for the demo, often show less than spectacular results when they attempt to do forex online trading in a real account.

The reason why demo is so different from the real thing is two-fold.

The first and well known difference is in trader psychology. A great change in behavior happens when the person is aware of risks and rewards associated with a certain action. Would you agree to make a two-week business trip to Paris? How about Baghdad? What if you get triple pay while in Baghdad and can stay at an army base? What if you get triple pay, but need to travel the country alone? The answer is different depending on the circumstances, although the action in question doesn’t change. Fear and greed are basic instincts, and no matter what you tell yourself, you will act differently while trading with your own real money on forex. It’s a fact of life and there isn’t much you can do about it, except constantly being aware of this effect and learning to adjust to it.

The other and more obscure difference between demo and real trade is in order execution.

Demo forex accounts are running in fully automatic mode. A real account will have a real person executing your trades if any significant sum of money is involved, market volatility is high, or your broker has put you on watch for trading or winning too much. As a result, your trade can take several minutes to execute, while it always takes a second or so in a demo account. Unfortunately, the delay is usually the longest when the price is exploding. Especially if you use market orders, the price at which you finally get filled can be very bad.

If that weren’t enough, forex simulation on a demo account does not model the filling process. The demo simply takes the price feed, usually from Reuters, and fills you automatically at the last price that was in the feed. In the real forex market, when the price is moving fast, you will probably experience problems with filling. The dealer may inform you that there is no current price, or you may get an offer that is significantly different from your order.

Altogether, it is too easy to trade in demo forex. Your judgement is not affected by fear and greed, improving your analysis. You don’t second-guess your decisions in the demo, and cutting losses is a non-issue when they are virtual. Order delays and bad fills don’t happen. Because of this, many of the skills that you learn in the demo work to your disadvantage. Of course failure of a strategy in the demo means that it needs to be improved, so this is a useful test, but it doesn’t work the other way around. Success of a strategy in the demo may or may not be indicative of its real performance. This is why the best course of action is to use the demo for getting comfortable with the platform and the market, and move on to the world of real trading as soon as possible.

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