Why Demo Account Performance Is Often Better Than Real Account Performance?

[abdulla1]

Over the past several years, the popularity of online currency trading has grown substantially. Each day, online FX brokerage firms attract new investors - each of them lining up with a glint in their eye, lured in by promises of easy money. Most of these companies allow you to sign up for a free demo account which lets you place mock trades using their trading platform to get a feel for the excitement of currency trading.

In the casual world of free demo accounts - many young traders find they are able to garner impressive profits without a significant amount of effort. It almost seems too good to be true. But transferring this success from a demo account to a real account is far less common. Why is this?

The actual trading platform behaves the exact same way, the market doesn't care whether you're a demo or real trader - so what is different? It's you who has changed. Not your personality, not even your trading style - but the factors that affect you are different.

What is the key factor to trading success?

The search for the "Holy Grail" of trading has been a common theme throughout the history of markets. There are a variety of different techniques. Those whom are inclined towards number crunching and pattern recognition may prefer technical analysis, whereas those more focused on the big picture, logical macro perspective prefer fundamental analysis. Then there are specific methodologies like swing trading, trend following or even more esoteric ideas like the Elliot Wave theory. Which one is best? There are examples of very successful traders using each methodology.

Since most new traders lose money - perhaps the more appropriate question to ask is, "What is the key factor to trading failure?"

Greed and Fear

Trading is an atmosphere rich in the porous emotions of greed and fear. The current price of a given security or financial instrument at any point in time can be thought of as the confluence of greed (bulls) and fear (bears). These two emotions make up the core of humanity itself. When market information is released, trading can be a high intensity experience. Sensing danger, your body releases adrenaline that acts to accentuate both your greed (fight) and your fear (flight). Because these emotions are so strong, they can cause you to act irrationally, ignore your system, stated set of rules or trading plan and to act upon impulse. Indeed, this is a genetically programmed response - but it is often also the trader's downfall, especially when he's playing with much better capitalized, more sophisticated and experienced foes that know how to manipulate those emotions.

When you are a trader - you are always under the influence of at least one of these two emotions, even if you don't have any trades on.

Impact of fear and greed on your trading

If the market's going up and you're in - greed is telling you to buy more and fear is telling you to take your profits while you still can. If it's going down, fear of being wrong makes you hold onto a losing position - and then greed sometimes convinces you to "average down" your position (and buy more) so it'll be easier for you to come back.

If the market's going up and you're not invested - fear is telling you that you're missing out on easy money but it's your greed that causes you to get in just after the greatest increase (just when its about to reverse course). If the market's going down and you're not invested - greed is telling you to get in as the price is cheap, while fear reminds you that you'll miss out on this opportunity if you don't act quickly.

Perhaps if we just felt greed, or just felt fear we would be able to control our emotions a little better. But when both of these little devils whisper into our ears at the same time - it is often impossible not to listen.

The Thrill of Greed

The first time you try FX trading - you will feel the thrill of greed. It is an ecstatic experience, your brain flush with neurotransmitters and your mind giddy with visions of untold riches about to be reaped. Greed is bold, aggressive and incredibly exciting. It can take hold of you both mentally and physically. Just imagine the possibilities!

This greed is what draws us into FX trading in the first place - the dream of easy money and 100:1 or 200:1 margin rates. It inspires us and causes us to forego rational thinking in favour of reckless abandon.

In the movie Wall Street, Gordon Gecko says, "Greed is good", but it is also very dangerous - especially if you are unable to recognize when greed is the one doing the talking. Greed is also one of the most common techniques used to manipulate people. Every get rich quick scheme, promising untold riches for no money down takes advantage of your natural predisposition to throw all logic and sense out the window when greed pays a visit. The argument starts to appear very compelling and you ignore what would otherwise be clear warning signs. Like drunk goggles, greed can mislead you and when you eventually wake up you are often in a very precarious position.

The Fear of Losing

Fear can be equally as dangerous. The most potent and easily manipulated form of fear is your fear of admitting that you are wrong. Fear of having your precious ego bruised. This fear can cause people to do incredibly stupid things. The funny thing about this world is that everyone thinks that they are right. Most people would rather lose thousands of dollars than admit they are wrong. It is easy to feel ashamed of trading losses and live in denial but this is self-destructive behaviour. By denying the problem exists, you fail to take steps address it and only ensure that it will continue in the future.

Demo Trading

Demo trading is a great way to get started in foreign exchange trading. It is identical to real trading, except that you're using "pretend" money. Demo trading allows you to get a taste for what type of events move markets and how they move. It encourages you to learn more about geopolitics, macroeconomics and global finance and these are all incredibly positive things.

Demo trading also introduces you to the rapture of greed. Trading is a means to one of the purest, most raw and potent forms of greed. The whole point of trading is to make money and the more money you make - the stronger the pull of your greed becomes. It is intoxicating and can take complete control of you.

But demo trading does not introduce you to fear. There is no fear when you are demo trading. It is like you have a perpetual get out of jail free card. If you start losing badly on a demo account - simply start a new one. There is no accountability for your trading failures and only recognition of your trading success.

So your demo account does not teach you how to handle the emotion of fear. This emotion is most likely going to lead to your downfall. Greed may get you overextended, but fear will stop you from cutting your losses. You may think that fear of losing money would cause you to cut your losses, but the stronger emotion is fear of being wrong and that causes you to hold on to your losing position - until it's all gone.

There is also the issue of account size. Many demo accounts give you $50,000 to play with. This type of capitalization allows you to buy 5 lots (500K) of EURUSD pretty easily. If goes up 20 pips you've made $1000. Nice one. But when you open your real account - it's more likely that you put $5000 or $10000 in there to begin with. Now you're dealing with a 50K lot, which means you'll take $100 out of a 20-pip movement. But mentally you are used to getting $1000 for that movement so you usually end up risking more. Next thing you know - your 200K position has turned against you 50 pips and you've lost $1000. That's real money you just lost. You can't just start another account.

The capitalization of the demo account is sufficient to sustain losses and still come out on top. But your real account is likely to be undercapitalized and if you're trying to achieve returns similar to what you got on your demo account - you are going to blow up very quickly.

Being honest with yourself

Ultimately, while providing an excellent introduction to FX trading - demo accounts do not accurately predict whether you'll be successful trading real money. Markets are dominated by psychology and often go against what fundamental logic or technical indicators suggest should happen. The single most critical factor in your trading success will be your ability to control your emotions of greed and fear. These emotions cloud your judgment and cause you to trade recklessly. Demo accounts introduce you to the emotion of greed, but by their very nature they are risk free and therefore there is no fear involved. They are also likely to be better capitalized than your real money account, which misleads you with respect to the amount of returns you can expect to earn.

For all of these reasons, demo accounts allow you to avoid being honest with yourself and this is perhaps the most important factor of all. You need to know your edge and your limits and in order to know these - you must be honest with yourself.

This being said, demo accounts are still very entertaining and educational and I highly recommend opening one to anyone who's interested in getting a taste of the exciting world of FX trading. It's a great way to learn more about economics, global politics and yourself.

[andry777]

I think usually newbie traders suffered many losses in real account although they could make good profit in demo account because demo account

is really different with real account. The most reason is because of psychology and then because we underestimate real account after we succeed

to earn many profits in demo account.

[Hunter]

it might be because in demo account we have bit more freedom and that will cause us to make some very bold moves and use high leverage,but in real account normally we won't make such moves.that's one of the reasons for the earning difference between demo and real trading.

[boniez]

its fair actually, because everywhere the demo account only for exercise, so no one feels overwhelmed, but sometimes the beginners also have a bad performance in demo account when the first they got on to forex business

[hyipreviewblog]

in demo account you trade with nothing to lose....you only use virtual money for trading so if you lose, nothing will chance with your money....

I think better to use real account with a little deposit maybe $10 or $20 to learn on forex market...

[andry777]

@boniez

Yes, demo account is only for exercise for beginner traders and for testing our strategy in expert traders. Usually, demo account is better than real account

because in demo account is easier to obey rules and it's easier to accept risk. If we made few mistakes, we can take our mistakes but it didn't happen in

real account.

[indieover]

i noticed that i am more careful in my demo account than in my real account. in real account i am overcome by greed that i want to increase my lot immediately i will have some success in my lower lot. so that is why i have loss a lot in forex. while in demo trading. i just stick on the same small lot no matter what the outcome of the trading in demo.

[Nikhil]

yes its true sometime Demo Account Perpormance is go better than real to me and i think the casue here in demo i trade without fear and in real there is lots of exercise and sometime wrong decession and another important fact that here sometime play emotion and obviously greed whcih leads us loss.

[andry777]

@Nikhil

I think that is not sometimes but oftenly demo account is better than real account because in demo account, we used virtual money so we did trading

with nothing to lose. We can easily follow trading plan and we could easily to be dicipline to use good money management but in real account, we used

real money and our psychology will give impact too for result in trading. Sometimes, we didn't sure to open position or close position although in trading

plan, we must open or close position.

[antthenait]

Boss, I really strange of thinking this childish quarry that why demo account is better than real. Suppose for MBA mathematical calculation is very easy, but in practical field to make proper future estimate is very hard where need better experience. So like all here also demo account is best learning procedure , if any user make any mistake to take good decision, then can recover the mistake but in real money will be loss.

[andry777]

@antthenait

I think that is not the reason. Demo account is training to build your analysis ability and also place to make trading plan that will be used in

real account. If you made mistakes in analysis when you used real account, if you could control your emotion well so it is not big deal because

you have prepared risk management right? So both in demo account and real account, we can make mistakes but in demo account, we will

be easier to make profits because there is no pressure, we used virtual money.

[hyipreviewblog]

@ antthenait

I think that most people can trade better in demo account than in real market. It is emotion that plays here. When using demo account you don't need to worry to loss money but with real account you can't make mistake cause it can make you lose money. So if someone still can handle how to manage emotion I suggest not trade in real account.

[andry777]

@hyipreviewblog

That is better to use demo account to learn because there is no risk and we can test effectiveness of our strategy but there is time to use demo account

not only as testing platform but there is time to treat demo account as live account as simulation before we entered to real account. It can give us more

knowledges how to move technically in certain condition.

[hyipreviewblog]

@andry777

Learning forex can be done with demo account or real account.

If you are still new in forex you can use demo account to learn how to open position, how to put stop loss or take profits. And with demo account you can try some method you learn from ebook.

In real account you also are still learning how to control your emotions and how to manage your loss so it can bring profits for your next trading.

[andry777]

Yes, we can learn with demo account first to know how is the movement price of pair that we used in trading. But usually it will be different

to trade with demo account and real account because our psychology will be affected when we used real account. Because of that, usually

trading in real account is worse than trading in demo account because our fear, doubtful, greedy, etc could give impact to our decision.

[winzpc]

I think in demo account we doesn't have a assessment in losing the money. In demo account we only trade with virtual money and make us to trade as our will. When we loss in trade we doesnt't need to worry to cut loss it because we always hope that the price with turn into profit and when we are in profit we can let it run as far as we want without a fear to loss the money. But i think if we can try to trade demo like a real than we can use this demo account to help us prepare to enter a real market.

[antthenait]

@antthenait

I think that is not the reason. Demo account is training to build your analysis ability and also place to make trading plan that will be used in

real account. If you made mistakes in analysis when you used real account, if you could control your emotion well so it is not big deal because

you have prepared risk management right? So both in demo account and real account, we can make mistakes but in demo account, we will

be easier to make profits because there is no pressure, we used virtual money.

 

@andry777 again I would like to inform you all - that demo account is set for training or a practice session. I completely agreed with you that there is a chance of no risk of loss any real money. But at the point of view of real treader that there are big differences between real and virtual account. Because many users have made too many profits in their practice, as there are low frequency available. But when they came into the real world - they had lost a huge - because there were too many experienced and professional traders.For newbie member it's necessary to learn from virtual account but real world has vast difference.

[purplegl]

In demo account, traders can learn to trade forex without losing money, while in real account, traders have to bear the risk of losing money.

For forex newbies, before doing the real trading, try to use demo account as well, because it is useful to provides some basic guides for newbies on how to trade in forex.

[hoanglong]

usually, we trade on Demo account without worry about loss or less worry because it's not real money, it's just virtual one so no problem if we loss 1 or 2 dollars but we cannot trade with the same emotion on real, it's real money that we all affairs loss.

[yogeshwartyagi]

I agree with haonglong there is no tension while trading demo account and on one wrong trade we can enter into another bigger trade and so on to cover earlier losses so ultimately we are left with the profit - but this is not the case in real accounts it is difficult to gather courage to enter in fresh bigger trade after bearing losses in the earlier trade.

[adnan007]

The only reason I find for this is because of out change in emotions. With our Demo trading, we are free enough to risk our virtual money without any risk and at the same time, we also can patiently wait for out TP to get hit. But, this isn't the case with real accounts. Our emotions are quite high in trading for real money as we look to take even the smallest of profits home and miss the opportunity to earn a better profit...

[yogeshwartyagi]

When when trading using virtual money we play it like a game and no sentiments are involved,

Further when a trade ends with loss we can simply open another bigger trade and cover up losses,

while about doing same with real account we have to think 100 times as real money is involved.

[wasi90lkv1]

in a demo account, the money is fake. whatever you do with a demo account, does not count much. this gives the trader a lot of freedom, which may result in success.

 

in a real account, you are dealing with real money. people may get too excited and nervous, in the process they can lose money.

[riddick09]

in a demo account, the money is fake. whatever you do with a demo account, does not count much. this gives the trader a lot of freedom, which may result in success.

 

in a real account, you are dealing with real money. people may get too excited and nervous, in the process they can lose money.

That is really the outcome when it comes to real account and real trading. But if we have experienced always and will predict our success after all of the mistakes we have done and also success then it will be a good effort on the demo account.

[adnan007]

Its all about the mind set I guess. While trading through a Demo account we dont have to rush our trades. We can relax as we dont have fears of loosing our money. However, in the case of real money, we do get excited even by a smallest of profits and do grab it without waiting patiently for big profits.