Just to clarify: a demo trading account is where people new to day trading can practise with real-time market prices, but in a simulated environment with pretend money. Registering for a demo account is free and easy, and gives the aspiring trader instant access to all the available financial markets – minus the risk.
A live trading account, on the other hand, involves depositing your own money to trade with and put at risk, meaning that all profits and losses affect your pocket and not just numbers on a screen.
Practical and psychological differences between demo and live accounts
Besides the major distinction of whether simulated or real funds are in play, a demo trader should know and prepare for some other dissimilarities before starting live day trading.
Execution. In a live account, trade orders cannot always be executed at the exact market price, and you may see slippage. Slippage is when the market price moves in the time between the order being placed and executed, possibly resulting in a less favourable entry point than planned. This can work out in your favour, too, as limit orders may benefit from “price improvement” in fast-moving markets.
Fees & commissions. Typically, the fixed commissions in a demo account will work just the same as in a live account. Default Bid/Ask spreads will also be the same. However, in a live account, spreads can widen if a market is volatile.
Trading Psychology. This is just the difference in the way we act as human beings. The absence or presence of real risk does have an effect. When you’re at real risk of taking a hit, you will tend to make different decisions than if possible losses don’t practically matter to your personal wealth and success.
The mechanics of opening a live trading account
You can skip this section if your live account is already open.
The first step is simply to fill out an online application form. This should take a couple of minutes. Note that the information you’re asked for doesn’t depend on your (presumably regulated) broker; most of it is determined byfinancial authorities’ requirements to gather certain information on customers. These are known as “KYC Rules” – Know Your Customer. You may also be required to snap a picture of an ID or passport as well as supply proof of address such as a utility bill. With e-statements now available online, this shouldn’t be too problematic.
Depending on the trading platform you use, you should soon be able to instantly switch back and forth between your demo and live account with the same login. Of course, it’s advisable to know which you’re signed in to.
FAQ: Should I wait to be profitable on demo before opening a live account?
Before we go any further, it’s worth addressing this very frequently asked question.
Basically: no. The differences already noted between a demo account and live account – especially the psychological element – make this a futile exercise. It is better to cultivate your trading strategy in a real market environment with small amounts of real money at risk. This can be done while you’re still honing your skills and strategy using a demo sandbox.
To learn more about how to best use a demo account, read our blog post on the subject.
The 5 steps to take before moving to a live account
So, with newfound understanding and confidence gained using demo account – and with your live account open and ready to trade – here are some final things to get right before being a real day trader.
1 Keep a grip on your expectations
It’s possible that you just made a small fortune in fake money and you’re ready to do exactly the same with real money. Be realistic, though. Learning to trade is a marathon, not a sprint, and there will be ups and downs. A lot of perseverance is needed and a lot of things are left to learn, so start small and slowly.
2 Learn to adapt to market conditions
One or two months on a demo account isn’t enough to familiarise you with every type of market environment. Fortunately, most online platforms host daily price data going back years and intraday data spanning the past several months. It is a simple exercise to go through past price charts and see how profitable or risky your trading style would have been in past markets.
3 Tighten up risk management
With fake money, you may have been quite casual about letting losses run until the market turned around. Alternatively, perhaps you tended to quickly grab small profits while they were available. When using a live account, your first goal is the preservation of capital. Remember Warren Buffett’s timeless advice: “Don’t lose money!”
4 Decide how much money you want to start trading
Keep an eye on the roses but watch out for the thorns. Think about worst-case scenarios and not just possible upsides. Would you be fine if all the funds you deposit were sunk in trading losses? If not, you need to reconsider how much money you are comfortable placing at risk. Once you’ve arrived at a thoughtful number, you are ready to go. Deposit enough to keep you interested but not enough to cause ulcers.
5 Carefully plan your first trade
Take your time, especially on your first trade. Good opportunities are sure to come, so there’s no rush. Write down some rules for how you will trade, including which order types will be used, where you will take profit if things go well, or at what level you will cut losses if a position goes sour.
* * *
Despite all the best efforts of whatever educational resources you’re using, there is only so much that can be learned by reading and practice – the rest must be absorbed through doing. Don’t be afraid to make the switch from demo trading to the real thing, but don’t be precipitous either.
