This article on ‘demo trading vs live trading’ has been re-purposed from Global Prime’s academy courses.
This is a very common question that gets asked, especially by those in need to build experience. If you are new to trading, do you jump straight into a live account or do you engage in demo trading? If the latter, for how long would you be demo trading?
I would focus on gathering enough in-sample via backtesting, while simultaneously trading the strategy in live markets with a live account. What’s important here is that the amount at risk should be small enough that won’t move the needle in your finances (everyone’s situation in unique).
Now, why going straight into a live account? In my opinion, demo trading cannot replicate the experience nor the emotion of live trading. Once emotions get in the way, a plethora of reasons from fear of losing, fear of pulling the trigger, revenge trading, etc, kick in, which can easily take us off course. Which is why, if within your reach, even if it’s going to be with an insignificant amount, I recommend to start with a live account. The more I’ve thought about it, the more I realised that demo trading can reinforce bad habits.
So, on one hand you’d be backtesting the strategy, while on the other hand, you’d be trading it live with an amount that means very little to you yet it creates the type of emotions you need to experience. This way you can accelerate your learning curve massively. You just simply move at a faster rate in building your skills, so why wouldn’t you want to do it? Just make a proper distinction when to be dedicated to either activity as each should have your 100% attention.
The more you trade live while backtesting, the more room to further optimise the strategy, find tweaks, select your markets, while still gaining exposure and experience. As a rule of thumb, I’d say a minimum of 3 months would be required. This would be the time to make all the mistakes in the world, identify them, do something to gradually eliminate them, know yourself better, and so on. You should stay on the small live account for as long as necessary until your results start being more consistent and learn to control your risk adequately.
Once you’ve built enough confidence and you start seeing the results on your side, give yourself permission to increase the capital on the line, whatever amount that is, and gradually increase the risk in marginal monthly steps if results prove profitable during this period. Just make sure that your transition from a small to a bigger account increases gradually and only when justified, in other words, let your results be the ultimate evidence to up your risk and capital.
Now, if you are well versed about the markets and you’ve been able to gather some years of experience, there is nothing wrong in jumping straight into live with some extra capital that would make sure what’s on the line is meaningful to you. However, I’d personally recommend that you control your risk with a sum of capital that initially represents 0.2% risk per trade as a symbolic sum. That will always be the lower bound. If your month is positive, double that to 0.4%. Apply the same rule of adding/substracting 0.2% depending on positive or negative month until you make it to 1%. Once you get to 1%, that’s your upper bound and the risk you stick with from then onwards. So, to sum up, start with 0.2% and go as high as 1% if the results are on your side.
By applying the above logic, you give yourself time to keep learning the strategy, its intricacies, the experience, while making sure you are not going maximum risk from day 1. This approach is a great challenge and motivator as one naturally would want to reach the 1% threshold to gain exposure to more capital in the line, but they will have to earn the right first.
Remember, at the end of the day, it’s a holistic approach, which means trading without mastery of your psychological aspects is a futile exercise. But similarly, having an excellent psychological control without the conviction of applying an edge also defeats the purpose. Give yourself the best shot from the get go by following these pieces of advice that I share with you to build both your psychology thru live trading to experience what goes on inside you and the determination via backtesting.