The Dangers of Getting Stuck in a Demo Trading Account

What Simulated Trading Won’t Teach You About Live Markets  | The Dangers of Getting Stuck in Paper Trading Limbo


This article on Demo Trading Account is the opinion of Optimus Futures

Demo Trading Account

Newer traders almost always start off with a demo trading account to get their feet wet in the world of futures. While testing out a broker’s platform through a demo is a critical step towards mastering a given platform, it is NOT a way to practice the markets.

A testament to this misguided notion are the hundreds of newbie traders who get stuck trading in “demo” mode for years, only to realize, upon “perfecting” their trading technique, that their skills honed in a simulated environment, yielded negative returns in a live market.

Long periods of demo trading may be much more detrimental than beneficial to your success when it comes to trading the markets. Below are five reasons we stand against long periods of demo trading, particularly for brand new traders.

Emotional Disconnect

The real challenge in evolving as a successful trader is to be able to make sound trading decisions while handling the emotional intensity of taking risks while putting your hard-earned money on the line. There is absolutely no way to replicate that trading environment in a simulated environment.

Some traders try to go around this hurdle by setting objective trade goals, beyond which they ‘graduate’ to a live trading account. For instance, you may think, “If I am able to trade in a disciplined manner and reach a certain demo profit level, I can then begin trading live”. Nope. It doesn’t work that way.

Without real money on the line, you will never know what it actually feels like to trade live. And we’re just talking about emotions. Actual trading performance (whether your system works or not) is another matter altogether.

Psychological Setback

Many traders wrongly believe that paper trading success is the first step in a new trader’s journey. But if you think about it more clearly, a prolonged demo trading phase can hold you back. You are stuck in the early phase of a so-called learning curve that is based on a “fake” market.

Remember, demos are meant for you to learn and get familiar with trading platforms, not for practicing live markets. If you think otherwise, you may be wasting time mastering a simulation that may bear no significant connection to a real market. And if you get pleasure from making profits in a simulated market, know that your profits are as correlated to your live account as Monopoly (board game) is to your real bank account. There’s no connection.

Worst case scenario, your demo trading doesn’t work out. Now you’re back to square one but in a demo environment. In a live environment, tweaking your trading technique might actually make a difference in terms of real learning, real trading, and eventually, real profits (and losses).

No Platform to Develop Sound Money Management Skills

Understanding risk in trading is often not as simple as reading a good book on money management or trading psychology. Far from it. Most of it is learned on the job, hands-on, guzzling grit, making painful mistakes, having real skin in the game and getting financially flayed.

If a trade suddenly spikes in the opposite direction, your response in effect and action might vary dramatically in a live versus a demo trading account. While in demo mode, you might still feel somewhat disconnected, whereas, in live mode, you’d be near panic, especially if you had thousands of dollars on the line.

Real money on the line makes you pay attention. Period. So does real growth. And more so, real loss. You can’t replicate this kind of emotional and cognitive intensity in a paper trading account. And you can’t afford to bring this lax demo-forged mindset to a live trading scenario.

Unrealistic Expectations

Ever notice how the CFTC and NFA require all commodity trading advisors to disclose their “live” versus “hypothetical” (i.e. demo) trades? It’s because the two are very different. Sometimes they’re correlated, but most of the time they’re not.

Trading successfully on a demo for too lengthy a period may give you an inflated sense of your own capabilities. So, what if you made a million bucks in a demo trading account? There’s no virtue in being a “demo millionaire.” It proves nothing, does nothing, is nothing.

Heightened expectations may be the last thing you want to have when just starting out with live trading.

Remember, a few minutes in live trading can tear down years of success in a simulated environment.

Your Account Isn’t Growing

Perhaps the most obvious setback of prolonged simulated trading is that regardless of how successful or unsuccessful you are, you are creating zero impact on your actual account equity. Whether you are trying to extend your winning streak on the demo trading account, or are simply too afraid to put your money on the line, prolonged simulated trading will not help you overcome the fear of live trading nor will it have any anticipated positive impact on your actual account equity. If it isn’t clear by now, a game is a game is a game (borrowing a bit from Gertrude Stein).

As compared with a live account, it certainly isn’t the same. To be rather crude, the game is a bit lame, unless you take it for what it really is–a way to learn how to use a platform and all its functionalities. Everything else beyond that point is simply immaterial. If you don’t believe it, then you haven’t really traded yet.

Here’s an analogy: there’s a difference between actually riding a roller-coaster and reading about the experience of riding a roller coaster. If you’re too afraid to do it, then don’t. If you can’t afford to do it, then, by all means, don’t. But if you can afford to do it, and you still refuse to do it, then perhaps it’s not for you…until you actually do it.

The Solution

As mentioned at the top of this piece, the purpose of this article is not to discourage you from opening a demo trading account for platform testing, and rudimentary technique-building. The idea is to discourage you from getting stuck on a demo. It’s a waste of your time, one in which you will likely not progress. It’s a zombie-land of “wannabee” traders.

The solution to avoid falling into the pitfall of supposedly “laboratory-controlled” trading conditions is to get beyond it. Learn the platform. Trade live. Beyond this point, we believe a demo trading account loses all merit.

If you’re too frightened to jump into a live market, one solution is to trade E-Mini micro indices. Smaller risks (dollar-wise), but just watch the liquidity levels if you plan on trading ultra-short-term methods.

Trading with part of your equity still brings into the equation the aspect of emotions and the challenges associated with controlling them, while still keeping stress levels at bay since you’re taking smaller risks.

The aspect of emotional control and money and risk management skills always rest at the center of a successful trader’s skills set, and none of these have a chance of being added on for a trader on a demo trading account.

Ultimately, however, the best piece of advice comes from a Star Wars reference in which Yoda advises Luke Skywalker:

“Do, or do not. There is no try.”

There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.

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