What you need to know before switching from demo trading to live

Demo trading accounts are a wonderful thing.

But, no matter how hard I wish, there’s just no way to spend that lovely ‘play money’ that sits in a demo account. The only way to make real profits from trading is to bite the bullet and start live trading.

But how do you know that you’re ready to make the switch?

What are the differences between live and demo trading?

And what happens if you make a mistake in live trading?

Opening a demo account

No matter how experienced you are, or how much money you have in your trading account, I firmly believe that all traders need a demo account.

Back in the dark ages when I began trading, a ‘demo account’ was better known as ‘paper trading’, and it was exactly that – you’d note down on paper the price at which you’d have got into your imaginary trade … and the price you’d have left that imaginary trade … having checked the chart behaviour in-between times.

Fortunately, now it’s much simpler, and most brokers offer online demo accounts, which they’ll load for you with a few thousand virtual pounds, and you get most of the functions of a live trading account.

Some brokers advertise their demo options on their home pages, while others tuck them away (obviously, brokers would prefer that you trade with real money – they don’t make a penny from their demo accounts). If the demo option isn’t obvious, try taking a look under ‘platforms’ options – or ask their customer services. Again, if they close down your demo account after a set period of time, ask for a new one – don’t be rushed into live trading before you’re ready.

There are great reasons to use demo accounts:

• To become familiar with how a new broker works, so you know exactly which buttons to press and you can make teething errors without risking any money.

• To practice the routine of spotting and placing trades. It’s too easy to think you’ve spotted a great opportunity when looking at charts, but if you’re actually having to find the trade, place the trade, pay the spread costs … suddenly the process can become unworkable. I’ve seen plenty of trading methods that look great on paper, but with the reality of trading are impossible to act on fast enough.

• To build a simple track record and prove that something’s profitable before risking money.

But there are things that a demo account can’t do …

A demo account also can’t teach you how you’ll feel when your account is in 20% drawdown. It can’t teach you to stay disciplined when things get stressful.

On a more practical note, the data feed that your broker uses for their demo accounts will be different to the feed they use for their live accounts. 99% of the time, this will make no difference at all, but, when markets are moving quickly this can have an impact on results. Demo accounts aren’t subject to lack of volume, so you’ll always have an order filled at the level you request, without suffering the slippage that you might get on a live account. So, if the market dives through your stop level, on a live account you might not get stopped out until 20 points lower, while a demo account will close you out at the requested price.

This can work in your favour, but (more often than not) slippage goes against us. So, in a fast-moving market, it’s likely that a live account will find it harder to be profitable than a demo account.

And one final point is that you won’t be paid dividends on a demo trade. Although spread bets don’t get dividend payouts, they do get what’s called a ‘dividend adjustment’ – however, these aren’t usually paid out on demo accounts.

How do you know you’re ready to switch to live trading?

• You are consistently following your trading rules in a disciplined way.

• You’ve been showing a profit over a reasonable period.

• You have a plan for how you’ll deal with a drawdown. (If you don’t, check out these posts – here and here – which are full of ways to halt losses in a drawdown.)

• You’re happy with your broker and know how much your trades will cost you in spread and/or overnighting charges.

How long is long enough for demo testing?

This depends on the timescale of your trades, market conditions, how much track record you’ve already built from past data, and any adaptations you’ve made along the way.

You really should have data for 100–200 trades. But some of this data may have already been collected through back testing, in which case you won’t need to run in demo mode for so long.

If you’re day trading, you could steam through 100+ trades in just a few days. But if you’re taking long term positions, you may not place anything like that number over a whole year.

You’ll also want to see your system working over different market conditions to check how it reacts when markets are calm, when they are volatile, when they’re trending and when they’re stuck sideways. (So beware of getting in too soon if you’ve collected a lot of data quickly.)

And finally, if you’ve made any adaptations during your testing process – these will need to be trialed in demo mode too.

What to expect when you move to live trading

We generally switch from demo to live trading in a flurry of optimism. It’s normally sparked by a winning run, when our profits are riding high and we’re feeling confident.

Experience will tell us that moments of confidence like this are often followed by a pie-in-the-face moment … so it’s important to be prepared …

• You could hit an immediate (and natural) drawdown. Trading is a bumpy road, and those bumps hurt more when it’s real money at stake. Just because your last 5 trades on the demo account were all winners doesn’t mean that the next 5 trades on your live account will be winners too.

• If you are struggling to achieve the profits you saw in demo trading, then you’ll need to consider that your trading method may not be resilient enough to survive live markets. If you’re looking to scalp a small numbers of points, perhaps a few points slippage here and there are enough to turn you from profitable to losing.

• You’ll still make mistakes. Hopefully we make our worst newbie errors in demo mode, but practicing on a demo account won’t automatically make you immune to mistakes. Try not to give yourself a hard time.

• You’ll discover the emotional rollercoaster – welcome to the fear and greed of trading! Start out live trading with minimum stakes so you can ease yourself into the psychology of live trading, where losing trades send us into a tailspin of self-doubt, and winning trades can tempt us to overstretch ourselves.

Because of the way live and demo accounts look so similar online, it’s easy to assume there will be no difference. But it’s crucial as you make the shift over to live that you keep risk to a minimum – this should still be viewed as a testing period. Plus, stay disciplined and …. if you feel you need to step back … you can always revert to demo again while you assess your progress.

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Related posts:

What is paper trading, and why it’s still important What you need to know before you open a live trading account