Why Demos Don’t Work

A lot of people will make a (virtual) fortune in Stock and Forex “demo” trading accounts, then wonder why it doesn’t pan out in their real-life accounts. Well, here are a few reasons why (from a ForEx perspective)

Spreads don’t mirror real-life spreads in demo accounts. Often, they’ll give you exactly what they advertise in a demo account. This ignores the fact that during news-heavy days or heavy trading the spreads increase, possibly stop-lossing or margin-calling your position right before the expected long/short run.

Spreads don’t mirror real-life spreads in demo accounts. Often, they’ll give you exactly what they advertise in a demo account. This ignores the fact that during news-heavy days or heavy trading the spreads increase, possibly stop-lossing or margin-calling your position right before the expected long/short run.
“Slippage”. This refers to the fact that in very fast-moving markets, automated trading platforms can’t actually find a buyer or seller in time to divest you of your position. This can — and will — mess up your money-management calculations.
Of the few who back-test their trading strategies, many don’t trade their backtest platform during the same times or from data provided by the same market-maker.

These are just a few reasons that I see for nice-performing demo accounts to fall apart in live trading. I’m still playing in the demo-world at the moment, gaining and losing thousands of virtual dollars until I get a better handle on what it is I’m doing. Even with my brief exposure to the market, though, I’m seeing how the players at the table get cleaned out again and again despite their best bullet-proof “systems”.

It pays to bet small when you’re the newbie.

One thought on “Why Demos Don’t Work”

matthew says:

April 24, 2008 at 12:34 pm
I talk to much, and yet…

I know I write too much, and yet today, I had to draw another parallel. One of my hobbies is flying radio-controlled model aircraft. Frequently, people ask me how to get started in the hobby. Invariably, my advice is the same:
- Buy a “trainer” airplane with a radio that can be hooked up to a “buddy cord” so that someone else can take control when you screw up.
- If you live near Salt Lake, plan to show up on Wednesday evenings between 5:00 PM and sunset during daylight saving time at the Jordan Modelport, and my club will give you free flight lessons.
- Buy a simulator. The $200 for a sim may seem expensive for a piece of software with a little plastic controller, but it will save you the cost of a new airplane because you’ll crash less.
If you crash the sim, you’re going to crash in real-life. The sim is, in fact, EASIER than real-life in most regards except a few where it models real life poorly. So simulator stick time is no guarantee that you won’t crash in real-life, but it is a guarantee that you are at least as capable as the simulator can make you given the amount of time invested.

If I translate that to generic advice:
1. Set yourself up with a standard, accepted way of getting started. Don’t buy the high-performance setup right off the bat; get used to your training setup, even if you think you’ll quickly exceed its capabilities. It won’t fly the best, it won’t be the coolest, but you’ll experience earlier success that higher-performance options would deny you. And every so often, it will be useful to revisit that training setup to realize how much you’ve grown from your earliest experiences.
2. Find a mentor. You’ll learn more with someone standing behind you to coach you than you can learn on your own.
3. Use the simulator, of whatever sort. Even though it’s not perfectly accurate, you have the guarantee that if you don’t succeed on the sim, you won’t succeed with the real thing, either.
Now I just need to hunt down a Forex mentor.

—
Matthew P. Barnson

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