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The Differences Between Demo Trading and Live Trading

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Written By
Dan Buckley
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
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Updated
Mar 30, 2020

A demo account is inherently a different type of trading environment relative to trading the markets in real-time.

Because real money is not committed to demo accounts, the results achieved from trading in a simulated, controlled setting can differ materially from the those achieved when trading the markets with real capital.

The primary reason is that there are execution-related differences between trading with virtual money and making live, real-money orders in the markets.

Execution differences

1) A broker may execute demo orders instantly and smoothly. But slippage may occur in a live trading environment where spreads are dictated by market conditions and liquidity providers.

In a demo trading environment, you will typically be able to fill any volume for the given spread. However, the position sizes you’re able to trade through live activity will be contingent on what’s currently available in the market in real time.

Spreads and the extent of your position sizes may increase your true trading costs (and tend to in a non-linear way), particularly in less liquid securities and in more volatile trading environments.

2) A broker’s data feed and price spreads for its demo accounts may differ from those provided for real-money trading accounts.

Brokerages have to pay fees in order to access quotes from the live market. Moreover, liquidity provider fees add additional costs for the broker. Demo accounts, on the other hand, can be opened much more inexpensively and help provide a cost-effective demo trading service to their clients.

A demo account will mirror the trading conditions associated with a real money account, but it is unfeasible to have it match exactly.

The element of psychology

There can also be a psychological component between demo and live trading.

In a demo environment, a trader may be inclined to inadequately evaluate the actual level of risk they take on and/or overtrade, particularly when virtual money trading results have no real-life consequences. The same level of discipline when trading your own money may not be there.

This can nonetheless lead to ingrained habits and behavior that carries through to a live account and lead to negative trading results.

The benefits of trading on demo

Demo trading has great benefits to test out trading strategies and risk management in real-time and is useful for trader education purposes.

When used as an educational tool, demo trading provides a risk-free start to trading the financial markets. One can learn without using (and usually losing) real money.

Looking for demo accounts?

Choose from various brokers on our dedicated brokers page. We have recommended brokers to select from in various verticals, from stocks, forex, binary options, and more.