Preparing To Deal In Currency With Real Money

When you are sufficiently comfortable using your demo forex – that is, you understand the numbers shown by the terminal, you can calculate your margin requirements before opening a position, and, most importantly, you have a feeling for the risk involved, it is time to try trading with real money. Becoming great at demo trading can lead to a false sense of security, 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 trading the demo, winning contests, and getting high virtual profits with excessively risky trades, often show less than spectacular results when they attempt to do forex online trading in a real account.

Real trading is unlike the demo for two main reasons.

The first and well known difference is in trader psychology. Human behavior changes dramatically when the person is aware of risks and rewards associated with a certain action. Would you agree to cross Detroit on foot at 11AM on Sunday? How about 11PM on Friday? Now, would you do it at any time carrying the equivalent of your annual income in borrowed money? What if you could keep the money if you make it to the other side at 11PM on Friday? The answer is different depending on the circumstances, although the action in question remains the same. Fear and greed rule the markets, and no matter what you tell yourself, you will act differently while trading with your own real money on forex. There is no easy way to circumvent this effect. Basically, you have to learn to be aware of it and make conscious adjustments when under stress .

The second and less well known difference between demo and real trade is the way the trades are executed.

Demo forex accounts are completely computerized. A human dealer is most likely involved in execution of your trades in a real account if any significant sum of money is involved, there is turbulence in the market, or your account is flagged for some type of undesirable activity. This means that order execution may be delayed for a minute or even more, while it always takes a second or so in a demo account. Inconveniently, you get the delay exactly during the fast price moves when you need split-second speed. Especially if you use market orders, the price at which you finally get filled can be very bad.

In addition to that, there is guaranteed order filling in a demo account that doesn’t exist in real world. Using a generic price feed, the brokering computer 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 when you finally get a quote, it may be way off from what you see in the feed.

Altogether, demo forex is too forgiving. Your judgement is not affected by fear and greed, improving your analysis. A wrong decision has ho consequences in the demo, and it’s a lot easier to cut virtual losses than to cut the real ones. 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 a strategy that loses in the demo is guaranteed to fail in the real market as well, so this type of testing helps, 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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