When you decide to invest your money on the markets, you need to choose a broker and try its trading platform to determine if it suits you, if it’s user-friendly, whether the proposed products are the ones you want to invest in, etc. So you will first open a demo account before opening a live account and deposit funds.
MetaTrader, provided by MetaQuotes Software Corp, is one of the most well-known trading platforms. The MetaTrader4 (MT4) platform dominates the FOREX market, while MetaTrader5 (MT5) offers access to other markets depending on the broker you’re using (FOREX, CFD, Futures, Equity markets…).
To better understand the main differences between the MT4 and MT5 platforms, I recommend you read our previous article: MetaTrader 4 vs 5 – Which One? (2015 Review) to know which platform suits you best.
MetaTrader: Demo Account vs Real Account
Slippage, re-quotes and latency time in execution
At the execution level, you might think that you shouldn’t see any differences between a real account and a demo account. Yet, you can often observe differences in terms of liquidity, slippage or latency depending on the broker you’re using, because a demo account cannot completely simulate the supply/demand aspect.
- Market Liquidity is the term for buying or selling an asset without triggering major changes in the asset’s price.
- Slippage is the difference between the required price and the price at which the trade is actually triggered (entry price or exit price with any kind of order: limit orders, market orders, stop-loss or take-profit orders…).
- The Spread is your broker’s fee. It’s the difference between the buying price and the selling price, the ask and the bid price, hence the name of bid-ask spread.
The available market liquidity can differ depending on the market you are investing in, and the current market conditions that can increase volatility: is there a market-moving statistic/event? Is a central bank going to talk about its rate decision? Is a war being declared? Is there a natural disaster happening?
This liquidity’s depth cannot totally be simulated in a demo account if a lot of traders suddenly want to buy USD and sell EUR for example. These market condition changes also affect the latency time, slippage and the spread.
A broker may execute stop-loss orders more accurately with a demo account, whereas you will deal with considerable slippage with a real account, because of liquidity and markets conditions. The same goes for the spread, which might widen in periods of limited liquidity or during very volatile events (such as Brexit), whereas you often have static spreads with demo accounts.
The main challenge: yourself
The biggest difference lies in the psychological aspect.
With a real account, you will not have the same decision process, the same capital or the same reactions to profits (or losses) as with a demo account. Your money management will also be affected by your mental state and whether or not you respect your trading plan.
Your emotions will make all the difference between the performance of a demo account – because it’s not your money – and the performance of a real account. This time you have decided to move to a real money account!
Some tips to achieve the same performance on a real account
You must try to minimize harmful emotions to avoid polluting your trading.
You must try wherever possible to trade step by step using the resources of your broker, such as using different lot sizes: first micro-lots, and then mini lots, then 1 complete lot…
This is better to avoid trading products that you don’t really know because the volatility, the spreads, the margins etc. might be different than what you are use to. Once again, you should use the information available from your broker on margins, spreads and commissions.
Try to avoid trading in market conditions you don’t know, such as trading news, which causes high volatility and lower liquidity. It is also better not to trade on Friday or on Sunday night.
It is necessary to have a solid trading plan you have back-tested and most importantly that you will follow. It has to be implemented with good money management:
- know how to estimate the expected profit (place a limit order at least 2 times higher than the stop-loss),
- define the associated risk (stop-loss should not exceed more than 3% of your total capital)
- assess the level of investment required to take a position, taking into account the leverage effect. You should always have a risk/reward ratio before entering the position, typically 2x or higher.
You can improve your chances of success in trading by being more patient. Read our previous article: The power of patience in trading: why it will help you achieve lifelong goals.