Demo Trading vs Real Trading

Demo accounts are where most people learn how to survive the ups and downs of trading financial markets. The problem is that demo accounts don’t always represent reality. Demo accounts are usually offered with the best possible terms and fees – conditions which are out of reach for most of us. Furthermore demo trades execute free of latency and other handicaps that we have to deal with when using real accounts.

So how do we deal with these challenges of moving into the “real world”?

Moving to a Real Account: What to Consider

You’ve tested your trading strategy for a few months with “practice money” and it is now showing steady and promising returns. At this point, you may have decided it’s time to move to a real money account. This transfer process might seem straightforward and simply an administrative step. But actually, it can be one of the most challenging periods you’ll encounter as a trader.

Moving from a demo to a real account: Challenges
Challenges of moving from practice to real trading ©

Traders are often dismayed to find that their strategy that was highly profitable on a demo account just doesn’t work anymore after making the transition to a real account. In this article I’ll examine some of the causes of this, and what can be done to improve the chances of making a successful transition.

What are demo accounts?

Firstly, let’s examine what demo accounts are and why they exist. Demo accounts are the trading world’s version of a “sand box”. They allow traders to use virtual money in a simulated trading environment. They allow the user to practice the mechanics of trading without the risk of losing real money. They also allow convenient testing of new and unproven trading strategies.

Virtually all brokers offer free demo accounts where you can practice and test out the trading platform for a certain length of time. The spreads, fees, swap interest, instruments and trade execution should all emulate those of real accounts that the broker offers.

The profit or loss you see in a demo account should be able to be replicated in an account using real money. At least that’s the theory. There are several reasons why performance isn’t always the same after moving to a real account. These reasons can be grouped into two categories: technical and behavioral. In the rest of this article, I’ll examine these in more detail.

Technical Differences of Demo Trading

A demo account models an idealized trading environment. What this means is that the execution of trade orders is simulated to show what would happen in a perfect case. The perfect case being when the order you enter executes at exactly the price, time and in the quantity you would like it to.

The problem is that real trading involves many dynamic variables that are impossible for a simulation to properly model. These include supply and demand constraints, order processing and information transfer limitations as well as imperfections in the various technologies – some of these are beyond the broker’s control.

The net effect is that on most demo platforms, the trader is likely to achieve a level of performance that would not be reachable on a live trading platform.

Some demo systems recreate these imperfections better than others and so make a more realistic trading environment. This can be done for example, by “piggy-backing” into the live system. This solution however can create a “drain” on the broker’s live trading platform.

Others demo systems present you with an overly optimistic experience. For this reason, it is always worth asking your broker for a technical description of how their demo system works and how closely it mimics real trading. You can sometimes find clues buried in their terms and conditions.

Let’s take a look at some of these technical problems in more depth.

Latency Issues

The first problem in a real trading environment is that of latency or slippage. No electronic trading system is perfect. There will always be time lags between receiving an order and the platform being able to fill it (executing it or queuing it in the market on the instruction of the trader). These time differences may be small, but they can create significant discrepancies in trading performance – especially when markets are moving quickly.

Supply/Demand Constraints

Demo accounts don’t’ actually complete any real transactions. And because they don’t interact with the market it is impossible for them to model supply and demand properly. The quantity of lots bid or offered will never be unlimited, despite the size of the FX market. While the volumes traded in FX are large, so is the number of other participants.

It means that if other orders are ahead of yours in the order queue, you may not achieve the entry price you want. This happens simply because the bids or offers displayed at the time you entered the order have already been matched with other buyers or sellers. With a market order your trade is filled at a new price. With some trading models this triggers a requote and you have to re-enter the order. Otherwise, your entry price can be significantly different than when you first entered the order.

Similarly, if you placed a stop/limit order to execute at a certain price level, the entire order may not be filled at one instant due to insufficient supply or demand at the point the execution price is reached.

The aspects of supply/demand cannot be simulated entirely because the order flow from the demo account itself would influence the market.

Liquidity Gaps

A demo platform may publish a quote at which to trade when in fact there is no market. It’s not usually an issue when trading major Forex pairs owing to the size of the market and because retail order sizes are usually relatively small.

However there are cases in some instruments where an order cannot be filled because there is “no market” at a given point in time. These are known as liquidity gaps and they happen where there aren’t enough market makers offering or bidding at a given instant. This can happen for example when the market is adjusting to an important breaking event. This causes the price to “gap” a certain distance.

In real trading such an order would not be filled at the quote price because the broker’s matching system would find that there was no price to take at which to complete the order. In simulated trading the order may be filled anyway, even when the price “fell through” a liquidity gap.

Psychological Challenges

Trading with simulated money removes the monetary reward/penalty aspect of trading. But all of the latest research from behavioral finance shows that this eliminates one of the most critical elements (and challenges) of trading in financial markets.

It is very common for traders to misjudge this psychological difference between trading with play money and trading real money. While the mechanics of trading aren’t any different, trading with real money can cause subtle behavioral changes that lead to different decisions being made. With a practice account there are no consequences to trading decisions. With real money at stake the emotions of fear, greed, loss aversion, and regrets of missed opportunity come to the surface.

Of course, if your strategy is coded into a piece of software then this should be less of a problem. But only if an identical setup is used. Expert advisors can fall over when deployed to real accounts, often because of the lower amount of capital that is available. The advisor may have been tested with an unrealistic safety margin (in capital) and this cannot be matched on the real money account.

With the move to real trading what often happens is a lowering of risk thresholds and a more conservative approach to trading.

Overall this means the trader is likely to receive poorer returns. This comes for example from:

  • Having less capital to play with
  • Using higher/lower leverage
  • Tighter stop and take profit levels
  • Lower trading frequency
  • Less aggressive trading practices
  • Panic trading decisions – e.g. closing positions on drawdown

Tips for Successful Demo Trading

Choose a “like for like” account

Firstly when choosing a demo account you should opt for one that is closest to the account you plan to trade with. It doesn’t make sense to use a USD 100,000 demo account that trades standard lots when the one you plan to use will be a EUR 250 micro account.

Using a realistic account size and currency will help you to familiarize with the lot sizes, the fees, and the profit and losses on each trade. If you trade with a high cash balance on your practice account, this will give you an unrealistic sense of your margin for error.

Ask your broker if they can adjust your account balance to suit your preference.

Use a real money account

One thing that traders are doing more often nowadays is to bypass demo trading altogether and start with a real account with a very low balance. Brokers such as eToro and Oanda allow trading with very low cash balances and you can adjust the trade sizes accordingly.

Consider trading competitions

One of the problems with using synthetic money is that traders have very little emotional connection with what they are doing. And because there is no competitive element, they often lose interest.

For this reason many brokers have monthly contests for traders using demo accounts and give large cash prizes to those with the best performance. This makes trading a more realistic experience because there is a financial reward at the end of it. It can also make the process more enjoyable and engaging.

Websites offering forex competitions include:


This option is good for risk-averse traders who don’t want to place their own money at risk. There is no downside, other than time spent.

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About the Author

Steve Connell has spent over 17 years working in the finance sector as a trader/market maker and strategist. Over that time he’s worked for several global banks and hedge funds. Steve has a unique insight into a range of financial markets from foreign exchange, commodities to options and futures.

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