Differences between a real trading account and a demo account

Due to a lack of commitment and the absence of risk linked to real money, the results obtained on a demo account can differ significantly from the results obtained on a real account. It is common for traders to open an account with a forex broker and get great results on a demo account. But when a trader starts trading on a real account, he loses his money in no time. In this article, we'll explore the reasons for this phenomenon.

Even when a trader does great when trading on a demo account, his results on a real account are often way different. This phenomenon tends to happen because when your money is at stake, your mentality is often different than it would be with virtual instead of real capital.

This potentially significant factor should be taken into account by beginning traders when they're assessing the value of a particular trading strategy or the quality of a brokerage firm.

There are 2 main reasons why such differences can be seen between trading on a demo account and trading on a real account. They are reasons linked to the trading platform's execution and reasons linked to the trader's mindset. Both reasons will be explored below.

Differences related to the trading software's execution (on a real vs demo account)

The following potential causes of performance variations can sometimes be attributed to software execution issues:

• Forex brokers often don't send out requotes in the prices that it offers to traders using demo accounts, whereas they will be displayed to traders trading with real money.
• The prices and spreads (differences between the bid and ask prices) that brokers offer on demo accounts may differ from the prices they offer to traders using real accounts.
• Brokers often execute stop loss orders with total precision on demo accounts, effectively limiting potential losses, but considerable slippage can occur when these same stop loss orders are executed in a live trading environment.

Differences related to traders' minds (on a real vs demo account)

The potential causes of performance differences observed between traders using a real account and those on a demo account can be attributed to the following issues:

• A possible lack of emotional commitment when using "play" money can create an unrealistically positive trading environment on a demo account, which you don't find in real trading accounts, where the trader's actual capital isn't at stake.
• The fact that a trader doesn't stick to his trading plan has no real consequences on a demo account. As a result, a trader can develop bad habits that can cost him or her money with a real account.
• Traders may be tempted to underestimate risks when trading on demo accounts. This behaviour can have serious negative consequences when carried over to a real account.

Benefits of practicing on a demo account

Trading with "play" money on a demo account eliminates the psychological element of forex trading, which is why it is impossible to accurately assess a person's trading skills. However, demo trading can be of great benefit when used to test a trading strategy or to improve one's training.

When used as an educational tool, demo accounts for forex trading give beginners a risk-free start to trading in the currency market and other leveraged instruments, such as CFDs. Additionally, strategies can be tested in real-time trading situations without taking any risks.

Overall, trading on a demo account provides a great service for beginners who would otherwise learn how to trade - and likely lose - using real capital. While the excitement of risking real money when trading is lacking on demo accounts, trading with such an account for a few weeks allows you to learn to observe the market closely and can help you get a better idea of ​​how the forex market works without having to invest real money in the process.

Consider using a "cent" account instead of a regular demo account

To overcome some of the above-mentioned causes of performance differences encountered between real and demo accounts, many traders choose to open a "Cent" or "Micro" account using smaller fund amounts. Instead of depositing the entire amount they plan to use in the real market, they can test the waters without risking much.

This strategy allows them to test their trading strategies and their broker in a real environment, without risking the loss of all of their funds.

A "Micro" account allows you to trade with smaller amounts of money and smaller lot sizes, so that you can open an account and start trading with much less money, and therefore with a lot less risk. Some brokers even allow penny accounts to be opened with a deposit of just $1, making them more accessible to novice traders. Visit our broker comparison to select a broker that matches your profile.