I have a great trading idea!! I do my research, and whoala!! It looks great!! Time to test it… I open a demo account with some renamed broker… I start to paper trade, and then I see how good is performing… ohh wow… Should I sell this strategy to some hedge fund? No!! I will trade it to myself!! It’s working so good.
Ok, I’m ready to put real money on this… I can already see things I will buy with all this profit: bigger house, brand new car, etc… I’m so confident! Why not? The strategy in my demo account is working like a clock.
I start to trade it with my real account, and then I start to see how my balance starts to go lower and lower… and bam! I burn all my cash on this.
What happened? Market condition has changed? What’s going on?
So, here I will tell you why you shouldn’t trade on demo accounts:
- Requotes: brokers may never requote a price to a demo account, but they might often requote live prices in real ones.
- Spread: broker’s price feed and dealing spreads for demo trading may well differ from the pricing that is provided for live trading accounts.
- Slippage: broker may execute demo stop loss orders accurately, but considerable slippage may occur in a live trading environment.
- Liquidity: in demo account you will have unlimited liquidity. Your trades will be executed almost immediate. But on live, you may see that there is no market for your transaction, and you may wait until you get one.
Conclusion
To get around some of the aforementioned causes of performance differences between live and demo account, some traders have chosen to use small amount of funds rather than funding their entire trading account right away.
Ariel Silahian
http://www.sisSoftwareFactory.com/quant
https://twitter.com/sisSoftware
