How long should you stay on a demo account?
Reading time: 10 minutes
Two questions I have been asked more times than I can count are how long you should remain on a demo trading account and whether it is even worth the time.
My answer to the first question is that it depends; there is no one-size-fits-all approach here. To the second, my response is (and always will be) a resounding yes.
What is a demo trading account?
A demo trading account allows traders and investors to experience and trade live market conditions using simulated funds. From my perspective, it allows a user not only to become familiar with the platform’s functionality – which is essential, especially when real money is on the line – but also to test strategies and understand how orders are executed.
There is debate for and against the use of demo platforms. This is largely because they do not account for the emotional component of trading, which, in my opinion, provides a strong argument: ask any trader worth their salt, and trading psychology can either make or break you in this business. However, for me, a practice account is still a must.
Why is a demo account a MUST?
For new traders, I always recommend having access to and using a demo account. While I agree that it does not account for the psychological aspect, it does provide you with a blueprint of what your trading performance could be like if you learned how to control your trading emotions. This is the primary reason why I support demo accounts.
With a demo account, you can backtest or forward-test to see whether your trading strategy has an edge – meaning that it provides a return over a sample of trades. I know it is easier said than done, but you must treat it as a real account to get the most out of it. You must also adhere to the strict risk management metrics you would in live trading conditions.
One way to think about this is to try to treat a demo account as a driving test. We all know you do not really start learning to drive until you have passed and are tackling the roads yourself, and a demo and a live account are similar. You learn how to ‘become’ a trader on demo and then tackle real-world scenarios on live accounts to develop and hone what you have learnt.
Trading is a process
Once you have developed a trading strategy that you believe shows promise – whether it focusses on technical analysis or combines technical and fundamental analysis – I would begin by backtesting the approach to help ensure it is profitable over the long term.
You can backtest using several approaches; the simplest is a manual backtest, especially if you are using a manual system (not a systematic or algorithmic trading system). I go into detail about backtesting in this video, but suffice it to say that a manual backtest involves scrolling through enough data and manually logging all of your trades and their outcomes.
Once you have a strategy showing a positive bottom line – I always target at least 20 trades in the backtest, but the more trades, the better, to get an accurate reading – you can then move on to forward testing. When you conduct a backtest, you have very important data at your side. This tells you things like your win/loss ratio, your risk/reward ratio, the maximum number of winning and losing trades, and so on. Having this information propels you to a greater area of confidence and sets you up for a better chance of success when you do eventually move to a live trading account.
For example, let’s imagine that during the backtest, you noted that the strategy had five consecutive losing trades. This can take quite a toll when trading with real money and lead to some very detrimental actions, but if you have followed the strategy’s rules, you will be confident knowing that five consecutive losses have happened before and that it is nothing to worry about, thus enabling you to continue trading as objectively as possible.
Setting a goal rather than a timeline
I never set a timeline for myself to complete the demo phase. Instead, what I did – and many other traders I know – is set a performance goal. I needed to show consistency before I would move to a live trading account by consistently generating a return for at least three months. You could also set a performance percentage, such as making at least 10% on the account. Only then will I transition to a real trading account.
Do not be tempted to jump to live without this background information on demo, as it is unlikely that you will be profitable on a live trading account when you failed to do so on a practice account.
Moving from demo to live: How much should you start with?
The next question I am often asked is how much money is a good starting balance with a live trading account. My answer is always the same: it should be small enough not to cause financial difficulties, but large enough to matter and keep you focussed on the task at hand.
Let’s say you begin trading on a live account with US$1,000 and work with 2% risk exposure per trade: US$20. By following the same process you used on the demo account, you will gradually build your confidence in trading with real money.
Scaling up your trading account
Once you achieve at least three months of consistency with a US$1,000 account, you can add another US$1,000 and increase the risk to US$40. By continuing this way, you become familiar with the risk exposure and the trading account size, essentially adopting a technique known as systematic desensitisation.
This is the only process I have found that works for building a new trader from demo to live in a structured way. The issue with some new traders is that they overlook its benefits and start trading with a much larger live account than they should. By doing so, this can trigger a number of unnecessary emotions, such as revenge trading, and can ultimately lead them to throw in the towel before they get started.
So, to answer how long you should remain on a demo account, it depends on your performance. There is no other way to know. If you can maintain consistency for at least three months or reach a certain percentage goal with reasonable risk per trade, you can consider opening a small live account and continue building your account this way.
Trade on demo with FP Markets
With FP Markets, you have access to a wide selection of demo trading platforms, including MetaTrader 4 (MT4), MetaTrader 5 (MT5), and cTrader. The sign-up process is simple and only takes a few minutes to get the account up and running.
The three platforms offer unlimited access and remain active indefinitely as long as you log in every 30 days. While others may have different opinions, I have found MT4 to be a great platform for Forex traders, particularly those who use Expert Advisors (EAs) and systematic trading systems. MT5, however, offers more advanced charting features, quite a few more timeframes (ideal for short-term traders), and the ability to test algorithmic trading strategies. Finally, I found that cTrader offers more advanced execution capabilities and similar charting options to MT5.
Written by FP Markets Chief Market Analyst, Aaron Hill
