Trading Psychology 101

04 - Psychological Differences of Demo and Live Trading

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Some beginner traders in their first few months of live trading end up surprised that they are having difficulties replicating their success in demo trading to a real account. This is perhaps a result of underestimating the psychological differences between demo and live trading and not being able to make the proper preparations for it.

For one, having real money on the line can mean stronger emotions. While you were able to master controlling your fear of losing or your greed while demo trading, these emotions can have a larger impact when you are trading a live account. After all, it is not easy watching real money being lost during a losing trade so the temptation to give in to these emotions can be stronger. Some traders might even wind up reverting to their old trading habits of setting stops too tight or not sticking to one's trade plan when starting out with live trading.

This can be avoided by treating your demo trading mistakes as though they happened on a live account. Although demo losses don't translate to losing money, you can come up with penalties when you make trading mistakes such as putting money in a jar or keeping a tally of your losing trades.

The pressure to make up for a losing streak on a live account is also considerably stronger compared to having a drawdown on demo. When you are trading a live account, each consecutive losing trade becomes all the more painful since you know that you will have to come up with really good trade ideas just to make the money back. In demo, while the losses might hurt your pride, you know in the back of your mind that you can simply reset your account and start over without much damage.

Lack of proper psychological preparation can also lead traders to overtrade when they move over from demo to live. For some, this can be a result of a winning streak that makes them overconfident and forget all about trading discipline and proper execution. Overleveraging might also be a problem if one hasn't mastered proper position sizing and risk management techniques.

Remember that success in demo trading isn't a guarantee that your live trading experience will be profitable. At the start, it may be a bit of a challenge to adjust to your emotions and stay focused, but maintaining a solid mindset and working on consistent execution can be the key to long-term profits.

Keeping a trading journal that notes your decisions and rationale behind them can help you master trading psychology and take the lessons you learned from demo trading to live trading. Having a strong foundation in forex concepts and being able to keep a calm mind even in a volatile market environment can help you achieve a more seamless transition from demo to live trading.