If you’ve been following along on my forex trading adventures then you know I have been losing money daily. In fact I only have enough left in my account to open a few more trades; yet, in my demo account I am making money. In fact, today, in my demo account with FXCM I finished the day with a profit of $1012.87 but in my real account with FXCM I finished the day with a loss $49.24. So what accounts for my inability to make money when trading with real money and finishing a day with $1000 in profit when trading with fake money?
First of all, there’s a world of difference when trading with fake money from the experience when trading with real money. When trading with real money there is the ever present consciousness of the fact that you’re trading with real money and every position you open could potentially turn against you and cause you to lose money. This awareness immediately places you in a state of agitation. You hesitate to open trades and then, when you finally decide to go ahead, you panic the moment you see that the trade is going against you. You decide to close the position, but just as you’re reaching for the mouse the currency rate begins to fluctuate in the reverse. You gain a pip and then another and then another. You start to feel a little excited. Maybe there will be a break out in your favor. The rate will speed up the chart by 30 pips in less than a minute.
However, after your 3rd pip there’s a five minute period where you’re stuck in a cycle of gaining 1 pip, losing 2, gaining 2 pips, losing 1, gaining 1 pip losing 3, gaining 3 pips, losing 4…. You start to wonder if you should close your position on 1 – 3 pips before things turn firmly back in the negative direction; but then you reason that you’re trading a 10K lot and 1- 3 pips is only $1 – $3. You need more than $1 – $3 dollars, so you wait; but before you can blink things get suddenly volatile. You lose 3 pips, 4 pips, 5 pips. You think to yourself “It has to turn back positive. Let me set a stop at 25 pips. There’s no way it will drop by 25 pips when it was just showing signs that it would gain pips.” But there’s another sudden flurry of movement and before you know it you’ve lost 15 pips. You feel so dejected you say to yourself, “what the hell, I might as well leave it and let it execute the stop. Who knows, maybe it will turn around before then.” It doesn’t turn around. You hear the blip or whatever sound your platform makes, if any, when your stop loss is executed. You’ve lost $25 and a little of your confidence.
After a few weeks of having this experience repeated you find yourself with too little money in your account to have any hope of recovering from your mistakes.
In demo mode, however, you don’t have any real anxiety about losing money. You’re aware that the money you’re winning and losing is not real so you don’t trade with fear of losing or with over-excitement about winning. Maybe when you first start out trading demo you might have some fear and excitement even while knowing you’re only play trading; but after you experience the real emotions that come with live trading, you have no anxiety when you go back to demo trading. The relief of knowing it’s not real money with which you’re trading allows you to trade more freely. And it certainly does not hurt to have enough money in your demo account to be able to afford to put $300 at risk for the possibility of gaining $1000, knowing that if you lose the $300 you still have enough funds in your account to be able to recover with a few successful trades.