Psychological Differences Between Demo Trading & Live Trading

The Reality of Real-money Trading

Let me ask you a question: Did you feel a surge of emotions when you made your first real-money trade? Many traders become anxious when trading, and their hearts beat faster than usual due to the fear of losing money. It’s normal to experience these feelings when transitioning from demo trading to real-money trading because now actual financial stakes are involved. It’s essential to acknowledge that Forex trading has a real risk of losing money. Understanding this risk should prompt us only to risk the amount of money we are prepared to lose in each trade.

However, knowing what we should do and what we actually do are often different. Suppose you belong to the group of traders who initially excelled in demo trading but are encountering significant losses after switching to real money. You should try to bring your focus from the money to the trading itself. Once you make this mental shift, your trading performance will start to improve rapidly.

You need to understand that money holds tremendous power over us. It can bypass our logical thinking and trigger our primal instincts. The connection between money and time is undeniable. Time is our most valuable asset, and when our hard-earned money is at stake, it feels like our precious time is on the line, too. This emotional response can wreak havoc on our trading accounts.

While the market can take your money on any given trade, you have the power to determine how much you are willing to let it take. This is where risk management comes into play. The amount of money you risk on a trade greatly influences your emotional state. The more you risk relative to your account size, the more likely you are to make irrational decisions. To combat this, you can use a margin calculator, which helps you figure out the exact margin you should trade with according to your risk tolerance. 

No matter how disciplined or composed you may be, risking a large portion of your trading account on a single trade will inevitably lead to emotional distress. It’s human nature. Therefore, it is imperative to control your emotions by controlling your risk. Preemptively deciding how much money you can afford to lose without becoming emotionally attached to the outcome is key.

In reality, many traders are not fully aware of the potential of losing money when they start trading live. As a result, they may risk too much money on their first trades. When the market moves against them, they feel an immediate sense of anxiety and make impulsive decisions. Losing money is never enjoyable, but if you choose to speculate in the Forex market, you must be prepared to accept losses and have a plan in place to manage them. The market doesn’t care about your personal circumstances or financial goals—it will gladly take your money if you allow it to.

The Most Valuable Thing We Can Learn From Demo Trading

The experience gained from demo trading is indeed valuable for traders. It allows them to practice their trading strategies without the involvement of real emotions. However, it’s important to recognise that demo trading has limitations and should not be solely relied upon.

Once you have thoroughly tested and refined your trading strategy on a demo account and consistently made profits for a period of around 3 months or more, you may consider transitioning to a live trading account. 

The most valuable lesson from demo trading is the importance of emotionally detaching ourselves from our trades. Emotions often cloud judgement and lead to poor decision-making in the markets. Since a demo account removes the potential for emotions, you must find a way to replicate this mindset when trading with real money.

To achieve the same positive results you experienced in your demo account, it is crucial to develop a trading plan and adhere to it strictly. This includes setting predetermined entry and exit points and implementing proper risk management techniques. By following your plan and focusing on the technical aspects of the trade rather than the potential monetary outcome, you can maintain a disciplined and objective approach to trading, just like you did in the demo account.

How to Trade Your Live Account Like It’s a Demo Account

While demo trading allows us to trade without emotions and often leads to better results, replicating the emotionless state in live trading can be challenging. This is because real accounts involve the risk of losing money. However, it is essential to find ways to manage our emotions and make rational decisions even when trading with real funds. Developing a well-defined trading plan, sticking to it, and implementing proper risk management techniques can help us maintain a disciplined and objective approach. By focusing on our strategy and the technical aspects of the trade rather than the potential financial outcome, we can strive to trade with the same level-headedness as we did in the demo account.

3.1 Accept That You Will Lose…don’t Fight It

One important mindset shift in trading a real account is accepting that losses are inevitable. Even professional traders experience losing trades, sometimes up to 50% of their trades. However, they manage to remain successful by implementing proper risk management and taking advantage of favourable risk-reward ratios. Instead of resisting or fighting against losses, working with them and recognising them as a normal part of trading in the forex market is important. By accepting losses and focusing on effective risk management strategies, navigating the market and maintaining a profitable trading career becomes possible.

3.2 Don’t Risk Money That’s Not Truly “fun Money”

When trading forex, you should only risk money that you consider “fun money.” This means you should avoid using funds necessary for your essential expenses or financial obligations. Like starting any other business requires capital, forex trading is no different. Demo trading often yields positive results because there’s no emotional attachment to the trades due to the absence of real money. To recreate this mindset, it’s advisable to only trade with money you can afford to lose without causing significant financial stress or impacting your daily life. By treating forex trading as a business and using risk capital, you can better manage your emotions and make more rational trading decisions.

3.3 One Trade Means Nothing

In demo trading, there’s little significance attached to individual trades since there’s no real money at risk. However, in real-money trading, the stakes are higher. To replicate the mindset of demo trading, it’s crucial to only risk an amount of money that you are completely comfortable losing. Before entering a trade, ask yourself if you are okay with losing that amount, and proceed only if the answer is a genuine “yes.”

Remember that a series of trades, not just one, determines your trading success. Even if you have losing trades, maintaining a risk-reward ratio of 1:2 or higher can still lead to overall profitability. For example, if you win 50% of your trades, you could still make substantial profits even if you have a stretch of 50 consecutive losses (although such an extreme scenario is unlikely for patient and knowledgeable price action traders). The key takeaway is that one trade is not the be-all and end-all; the cumulative results over time matter.

3.4 Know What You’re Doing

If you haven’t mastered an effective trading strategy, such as price action, it is best to refrain from risking your money in the markets. Take the time to educate yourself and gain clarity on what you are looking for in the markets and your trading edge. Go back to learning and studying, and avoid trading with real money until you have the necessary knowledge and confidence in your trading approach.

3.5 Pre-plan Everything

While some situations require discretion, particularly when exiting trades, you can largely map out your strategy before entering the market. Doing so eliminates surprises and reduces the likelihood of making impulsive decisions based on the market’s fluctuations. This pre-planning approach allows you to trade with a clear and focused mindset, avoiding knee-jerk reactions and increasing the likelihood of consistent and disciplined trading.

Conclusion

One of the most effective ways to combat the emotions of trading with real money is to exercise self-control before entering a trade. Rather than impulsively jumping into the market, adopting a sniper-like approach to Forex trading is essential. This means maintaining a professional trading mindset, practising patience, and focusing only on high-probability trading signals that appear on your charts. Doing so can make a smooth transition from demo trading to live trading, minimising the impact of emotions and increasing your chances of success.