Almost every trader immediately notices the difference in their trading performance on a real account versus a demo account like there’s something almost magical that makes it easier to make money on the demo account. Indeed, it is common to suffer more heavy drawdowns when finally trading on the real. Some even believe that brokers can manipulate the platforms to give different performances on real money accounts. However, the issue comes more from psychological reasons, as the mind plays emotional tricks when we are operating with real money.
I remember my first trade on a real account. The fear of losing money and subsequent indecision came immediately, and even if I spotted a perfect trading set up, I still was often reluctant to pull the trigger.
It is very common to experience a sort of psychological block, and the fear of losing real money can be very strong and distracting. During simulated trading, we are simply looking at how to earn from that date, and don’t touch the thought of real loss. If the trade fails, we unconsciously think of a new opportunity to recover the losing position, and we aren’t flustered about what is lost.
During real-money trading, the emotions put into play are quite different. Fear, greed, insecurity, and sometimes the basic thought of losing hard-earned money make us make some questionable decisions.
Many traders, especially at the beginning of their careers, see the forex market as a tool to make easy money, and don’t consider the risk of losing.
Traders who are considering trading forex as full-time job must take into account that a solid percentage of their trades will have negative results; we cannot expect to gain from every single trade. For this reason, maintaining a good risk-to-reward ratio is one key element for a long-term successful trading strategy.
A good method to avoid this this type of psychological issue is to risk a certain amount of real money that we can accept to lose without any real concern, or emotional involvement.
Therefore, to avoid emotional involvement, traders must be willing to afford potential losses of a set amount of money in the game, and those potential losses should be established to not allow for any real issues in the trader’s everyday life. We should consider the risk in these losses as money that we can literally afford to throw away.
Trading experts are convinced that it is the amount, or percentage, of money risked for each trade that makes our trading emotionally involved or not. Therefore each trade that we place should not create any sort of anxiety, and rather should be having us feel almost as apathetic as if we were trading on a demo account.
It doesn’t matter who the trader is or the balance of his account. If a trader uses, for example, 20% risk for each trade, it will transmit a status of anxiety which will impact decisions significantly and botch the potential for success.
Taking this into consideration, traders should be able to control their emotions indirectly by calculating and minimizing potential risks for each trade.
How to learn from a Demo account
As always recommended for beginning traders, trading on a demo account is not only vital to consolidate the right knowledge and strategy, but to give importance to the emotional component.
The key for a successful trading style is therefore to have a detached approach from emotional involvement when trading on any type of account. The type of approach on a real account should emulate that of a demo account as close as possible.
A single emotional trade won’t affect us too much when we look at the big picture or the long run. However it is crucial, in order to become a successful trader, to manage all of our trades with an emotionally detached style and to plan all entries in the market with an efficient risk-to-reward ratio strategy.