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How to Seamlessly Transition From Demo Trading to Real Money

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Happy Friday!

This week’s question comes from Cooper, who asks:

I like to maintain a demo account as well as my live account. When I can’t pull the trigger on a trade, I go to my demo and enter it there. Gets it out of my system and I can watch it (and hopefully learn from it). However, my demo account is growing, and my live account is dropping… FAST! I did have my first profitable month (month to month) in February, and that was after switching to 4h and daily time frames and focusing on price action/support & resistance. I just can’t seem to make sense of how the trades that I’m entering are different. Obviously, I should be taking the trades I’m sending to the demo, but I just can’t get my brain to let me enter those trades. How would you recommend making that connection?

Usually, I like to keep the questions in these Q&A segments concise. But because today’s topic is a bit more complex than usual, I thought it appropriate to share the full story.

I also believe the situation above is something we’ve all dealt with at one time or another. Making the switch from demo trading to a real money account is a big step and is often not without challenges.

One of two dilemmas tends to arise when making the transition from a demo account to a real money account.

  1. You did well on demo but as soon as you switched to a real money account your performance suffered
  2. You run both demo and live accounts, but only your demo account is growing

Both situations tell me the same thing…

Your emotions are getting in the way. There’s something about the loss of real money that’s tripping you up, which is why your demo account is doing better than your live account.

The good news is there are a few potential solutions. None of the topics we’re about to discuss are quick fixes, but with the right amount of discipline, your dilemma can be resolved.

By the way, throughout this post, you will see me use “live” and “real money” interchangeably. Both refer to the use of your money versus trading fake money in a demo account.

Let’s begin.

1. You Aren't Using Risk Capital

risk-capitalFirst things first, if you aren’t using risk capital, your trading is going to suffer. There’s no way around this one.

What is risk capital?

Put simply, it’s money you can afford to lose. It’s money you set aside that isn’t needed to pay for living costs.

So if you plan on trading your rent money, you may want to rethink your approach. The same goes for any money you need for food, utilities or any other costs required to live your life.

Also included in this list is cash from credit cards. I realize some cards let you take out cash advances. And although U.S. brokers are now prohibited from allowing credit card funded accounts, I know it’s still available in other countries.

All of the above leads to one inevitable outcome…

Your emotions are likely to get the best of you. You can’t possibly risk money in the Forex market that you need for rent or food and not feel the pressure from it.

Trading Forex successfully is hard enough as it is. By adding the stress of risking money you can’t afford to lose, you’re making it even harder.

2. The Amount at Risk Is Above Your Comfort Level

emotions and tradingHow much can you risk on one trade without getting anxious or frustrated?

That’s a question you need to answer before every trade. And responding with a fixed percentage such as 2% of your account balance isn’t going to cut it.

As I’ve mentioned in previous posts, you need to know how much money is at risk, not just a percentage.

But more than that, you need to be 100% comfortable with losing every penny of that amount.

After all, it’s usually the money that triggers the emotional reaction. A percentage such as 2% has no meaning without placing a dollar amount next to it.

Here’s a little trick that could help…

Before taking your next trade, try writing the amount you plan on risking. So if you’re risking 2% of your account and that happens to be $50, write the following on a piece of paper, a whiteboard, an iPad or anywhere that’s clearly visible.

I am prepared to lose $50 or 2% of my account to see if this idea has merit.

Now, think about the statement you just wrote. Read it out loud if you have to. Do whatever you need to do for this amount to sink in both consciously and subconsciously.

While you read it, convince yourself that you stand to lose the entire $50.

After about 20 to 30 seconds, you’ll know if you’re risking too much. If you are, that $50 is going to look and sound like far too much money to risk on the next trade idea.

If that happens, try cutting the amount in half to $25. Keep cutting by half until you get to a figure that doesn’t intimidate you.

That’s when you’ll know you’ve found an acceptable level of risk.

By the way, the trick of cutting your risk in half also works wonders if you’re suffering from a losing streak.

Just keep cutting your risk in half until you get your confidence back. Once you get it back, you can begin to normalize your risk per trade.

3. You Aren't Planning Your Trades

planning a tradeThere’s a difference between a trading plan and a trade plan.

As I mentioned in a past Q&A post, think of your trading plan as a way to win the war. Your trade plan, on the other hand, is how you intend to win the battle.

Your trading plan should include things like the strategies you utilize, the time frames you trade and your minimum risk to reward ratio, among other things.

Your trade plan will be specific to the setup at hand. It should include things like your stop loss and take profit values as well as other key levels that could become a factor.

It all goes back to money and emotions. If you don’t have a well thought out plan before putting money at risk, you’re more likely to be influenced by emotions.

We all know the Forex market (or any market for that matter) doesn’t always behave. So you have to account for every possible outcome.

For instance, the questions below are just a few you should be asking.

  • What’s my reason for entering? (strategy, momentum, risk to reward, etc.)
  • What are my stop loss and take profit levels?
  • How much am I risking and am I comfortable losing the entire amount?
  • Is there any news coming up that could affect my trade?

These are all things you need to account for before you put money at risk. Because once money is on the line, it becomes much harder to differentiate the facts from your emotions.

4. Your Demo Account Balance Is Unrealistic

demo-moneyThis one is tricky. You see, many traders think that the balance of a demo account is inconsequential.

After all, it’s just fake money, right?

Plus it’s fun to experiment with a $50,000 account or maybe even a $100,000 account.

But if you plan on opening a live account with $500 or perhaps already have one with that amount, you’re doing yourself a disservice.

Let’s say you have a real account with $500. You also have a demo account with $50,000.

You did fairly well on demo, but you just can’t figure out why your live account isn’t growing.

One thought is that the profit from your $50,000 demo account is more meaningful to you than your live account.

What does that have to do with performance?

A lot, in fact!

If you’re risking 2% of the account balance on each trade, the profit from the larger account is $2,000 for a 2R trade.

Compare that to your $500 account where a 2R trade is just $20.

Which outcome is more likely to persuade you to relax a bit and not overtrade or over leverage your account?

I think we can all agree it’s the $2,000 profit.

You’re at a far greater risk of overtrading and overleveraging a small account than you are a larger one.

If this sounds familiar then you have two options:

  1. Save up until you have the funds to put on meaningful trades
  2. Convince yourself that learning the process of good trading is more important than the profits

You may want to consider doing both. But I will say that number two above is paramount.

Too many traders come into this business obsessed over making a lot of money. The problem is they ignore learning the process first. That process involves things like learning support and resistance, trend analysis, favorable risk to reward ratios, etc.

A lawyer doesn’t get to make a lot of money without first going to law school.

The same concept applies to trading Forex or any other market.

Overtrading and overleveraging are perhaps the two greatest sins in the Forex market. They’re also the least forgiving.

You do either one, and you’re likely to struggle. You do both, and I can all but guarantee that you’ll end up with a blown account.

It's All About the Money

moneyThe only thing that separates a demo account from a live account is the money. That’s it. Everything else is the same.

And what does money tend to do?

It triggers emotional responses.

Learn to troubleshoot this problem like you would any other dilemma. Eliminate the irrelevant and think through the problem.

One way to do this is to ask yourself the question “why?” up to five times. The idea is that by the time you get to the fifth why you’ll find the root cause.

Here’s an example…

I trade well on demo, but my performance suffers as soon as I switch to real money. (the problem)

  • Why? I cut profitable trades too early and let losses run in my live account.
  • Why? I’m afraid of taking too many losses, and I don’t want to give profits back.
  • Why? I can’t afford to lose the money in my account.
  • Why? I’m in a financial situation that requires the money in my account.

The method above is called the 5 Whys. It’s an interrogative technique used to explore cause-and-effect relationships.

Note that it only took four series of asking why to get to the root cause above. That’s okay as long as you get there.

The idea is that by the time you’ve asked why up to five times, you’ll arrive at the root cause.

Once you have this information, you can address the problem head on.

Final Words

If you find that your demo trading is more successful than your real money account, be sure you’re only using risk capital. If the money in your account isn’t disposable income, you shouldn’t be placing at risk in the Forex market.

Are you 100% comfortable with the amount of money you’re risking per trade?

If not, you should take a step back and reevaluate your risk threshold. Because if you go over this amount and the market moves against you in the slightest way, you’re going to be tempted to close the trade prematurely.

Plan your trade and trade your plan. It’s sage advice from some of the best traders out there.

To trade based on logic rather than emotions, you need to have a plan before risking any capital. If you don’t have a plan of attack before jumping into the market, your emotions will eat you alive.

The best defense against emotional trading is to keep risk small and always have a plan.

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About the Author Justin Bennett

Justin Bennett is an internationally recognized Forex trader with 10+ years of experience. He's been interviewed by Stocks & Commodities Magazine as a featured trader for the month and is mentioned weekly by Forex Factory next to publications from CNN and Bloomberg. Justin created Daily Price Action in 2014 and has since grown the monthly readership to over 100,000 Forex traders and has personally mentored more than 3,000 students.Read more...

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  • Andre Steenekamp says:

    If you are scared of losing real money, start with a $50.00 account and start the gearing at .01 and gradually increase it as your confidence increases.

  • Cagn says:

    You talk like you live in my account , mentor .

  • I love your post.
    My question is how do I stop letting my losing trades run-I can be positive in 15-20 trades and then I get a big loss and give back everything.
    Second I am afraid to let my winning trades run. I trade in small lots 0.02. usually on 15min. TF.- hour TF. Please help.

    • Fay, trading from the higher time frames (4-hour and daily) usually helps most traders. I’d start there if I were you.

  • Fabio Ramirez says:

    Hi Justin, your comments are always welcome. Most the time they hit the nail on the head. In this case, I would say the key word is discipline. Having a trading plan is easy; executing it, is a different story and there is where discipline comes in. One must resist the urge to put on a trade that does not fit the trading plan, otherwise you end up with a loss. I have been there. Also, you suggestion of risking 2% of capital per trade is a good one and I am trying to stick to it. Thanks for your blog/comments

    • You’re welcome, Fabio. Discipline is certainly key as you say. All of the planning in the world won’t do you any good without having the discipline to stick to it.

  • Graeme Normington says:

    Thanks Justin. Great lesson. I’m new to Daily Price Action & I’m getting a lot out of it. Trading profitably has been so very difficult. It’s really hard work (mentally I mean). Cheers.

    • That’s great to hear, Graeme. Becoming a profitable trader is one of the toughest journeys in life. But that’s also what makes it so rewarding.

  • Cooper says:

    Fantastic article Justin, thanks! Discipline is the key.

  • Thami says:

    Hi Justin

    Sound and proper advise, all the above will be applied in full. Thank you

  • Nicholas says:

    I have a problem about where to place a stop loss order. What is the best position to place a stop loss order in order to prevent stop outs.

  • Godfrey says:

    Hello Justin, How do i manage to handle a winning trade by not being paranoid on taking profits too soon. I see charts going towards the direction as analysed but i take profits too soon before reaching predicted target.

  • Moyin says:

    Hi. Am new here. Fantastic insights. My issue is that I start the day gaining on trades only to loose them back before the end of the day resulting in overall huge losses. How can I stop that? Glad for your advise. Thanks

    • Welcome! Great to have you. The simple answer is to stop overtrading and use the daily time frame.

  • Kolawole says:

    What is your daily time frame sir

  • >
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