In This Episode
- Why a simulator is much better than a demo account
- Why a demo account is best for EAs
- When you should consider trading a small live account
Is it Better to Start with a Demo Account or a Live Account?
Many traders jump straight into live trading with real money. But that usually leads to a blown out account.
We talk about when you should consider trading a demo account, a small live account or simply using a simulator. The best option for you will depend on if you're doing automated or discretionary trading.
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Read the Transcript
Hugh: Hi, Walter. From a psychological standpoint, do you think that traders should start with a demo account?
Walter: I think so. I mean, I actually think you should start with a simulator first because you can get more trades and you can get more data. So my preference would be to start with a simulator like Forex Tester or something similar. There are lots of them out there now and that way, what you can do is you get your data first.
The demo helps. Demo I think is a good next stage because then you see the trades kind of unfold in real time as they would in a real account. I do not think you can get the experience as fast in a demo account. So the advantage of a demo account is that it teaches you the patience that you need in real life.
Waiting for the setup to unfold and all that and then waiting for it to come to a resolution. Good or bad and then also it feels more real, I guess even when you have a demo account. So I always say things like, “You do a simulator then you do the demo then you do a small money account, and then you can graduate to a larger account” stuff like that.
The disadvantages of a simulator is that sometimes you are just not trading as you would with a demo or a real account. The advantages are you get a lot of trades under your belt. So what you have to do is kind of time-parse. Make sure that you are not dumping all of this data into your simulator account you know over two hours.
You have got to kind of break it up and be more vigilant with the way that you approach it. That is my opinion. What about you? What do you think about that?
Hugh: I think a demo account is definitely useful but a lot of people have the tendency to not take a demo account too seriously. It is probably actually more beneficial to throw like a hundred dollars into a you know a nano lot account and then just trade that for like a penny a pip or whatever.
The demo account is necessary because you should understand the mechanics of it. How to, you know, enter and exit trades. How to place pending orders and stuff like that but I think at that point it is really up to you. Is your personality such where you can take the demo account seriously or you need at least a little bit of money on the line.
Walter: It is true. It makes a big difference, doesn't it? Even if it is like five bucks you know on the trade or whatever. I feel like a lot of traders just do not see the value in the bulk trade data that you get from a simulator. It is kind of like they think of demo or live. They think that is the question and I do not think that is the starting place.
The other thing that happens I think is that you get really excited about a system. When you first demo it or first run it through Forex Tester and you kind of need a cooling off period. It is a sort of put it aside and then come back to it. There's lots of issues when you get into that.
For example, like if I said to Hugh, “Hugh, here is a system. What do you think?” You go, “Wow! I really like that one.” You started demoing it. If you are trading on the four hours, I do not know how long it would take you to get three hundred trades or four hundred trades. I do not know. I mean, it depends on how many markets you are trading and all that.
If you are trading a system like that on the four-hour charts, it might take you nine months to get the same amount of data. That you could get in two or three weeks if you were using a simulator. Again like we said, it is a very different experience. Live versus demo versus simulator.
Hugh: Another thing to consider is also if you are doing automated EA’s or whatever then I think a demo count is absolutely necessary. I mean there's a little bit of psychology like we talked about before. Where you have to turn the thing on and off but I think that the demo account really gives you a live real-time assessment of how well that EA works.
Whereas, if you just jump straight into live trading there could be issues like the spread and you know certain things with the broker. I have a buddy who blew out like a big portion of his retirement account because he just jumped in with the EA’s. He didn't realize that there are all these things that you have to check out.
So I think that's one case where a demo account is absolutely necessary for sure and then back testing also. You want to run that to the simulator and see what kind of numbers you get.
Walter: Definitely. There's a reason why when you connect to a server you know like in MetaTrader for example. It will say like you know you are connected to the live server versus the demo server. That is a very different experience. If anyone's ever seen that like my friends and I, we were running a strategy where it was like a grid system.
Where you were taking profit every three pips like on demo that was great. That was awesome you know and then it was only about three and a half, four weeks into it on live account when everything fell apart. We started getting slipped like crazy.
If you are taking three pips profit and you get slipped to pip then you are losing a third of your profit. So it's unsustainable but anyway it was just really interesting you know seeing that. A lot of traders have seen that. You see the different experience on live versus demo.
So it is tricky but for EA’s you need to know exactly how it works. A lot of times I think people get an EA and they think they know how it works. They do not actually test it. They think they know the settings or whatever. Like if you have someone code it for you and they explain to you or, if someone gives it to you or whatever and then you just don't know.
I always say why not just put it on a one-minute chart and test it out. See if you know what it does. It is ridiculous. On a demo, one-minute that's all you have to do. It does not matter if you are going to trade it on the daily. Put it on a one-minute demo account and see what it does.
If it does what you think it is going to do, that is okay.
Hugh: Technically, brilliant people are notoriously bad at explaining how something works. So I think you really have to not take their instructions for granted. Just like you said, test it out and see if it really works the way you think it does.
Walter: That is right. It is very rare to find someone who knows a lot and can explain it very well. It is not their fault really. It is not like their verbal skills are lacking. It is that their unconscious competence is so high and that's something that for you as a trader you can talk it out.
You can literally talk it out. You can record. Now it is so easy. I used to print it out and scroll. Write on my charts that I printed out when I took trades but you can actually talk it out. Now you can just record it on your computer. Talk about why you are taking a trade and then later on why you get out or why you manage to break even or whatever you do.
That can really help because that brings out what is happening in the background in your head that brings it out. That is why I find it really useful for me to talk about charts you know to an audience because things that I am thinking about, I do not realize that I am thinking about them. Unless I actually say it out loud you know, that is what I am doing.
It is really weird. It is so bizarre but that is a known thing in cognitive psychology. It is a known thing where they say the best teachers are those people that are not quite at an expert level. So, they're not novices. They're kind of in that intermediate area where they kind of just learned it but they've only learned it recently.
They are good at what they do but they are not at an unconscious expertise level because then it's just almost automatic. Same thing with driving. Think about it. Think about how hard it was for you to drive when you were younger because everything was conscious.
I've got to look in my mirror. I’ve got to do this and then turn on the signal and do this. All that but now if you try to teach someone how to drive, you'd really have a problem because you'd have to think about what you are doing all the time you know. It is tough.
It is really tough to think about all the calculations like, “Okay, that's an idiot over there. I have got to slow down because he might turn.” You've got all these hazards and stuff going on in your head. It's just totally like you are almost unaware of it really. It is just happening.
So anyway, I find it in trading I think is similar. All skills really.
Hugh: Totally. I mean, when I learned to drive I think it was my mom who said line that side of the car up with the line. So the whole time I was concentrating on that side of the car lining it up with the center line and then I was not like paying attention to other stuff but now you can do it without looking.
Walter: Exactly.
Hugh: Alright, cool. Thanks, Walter.
Walter: See you!
Hugh: All the information in this podcast is for educational and informational purposes only and is not trading or investment advice.
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