Competing with Paper : Problems with Demo Contests

I have noticed within the past several months that a new type of trading contest has become very predominant amongst forex brokers. These new contests – which you couldn’t find a few years ago – are made on demo accounts. Anyone can open up a demo account and trade whatever strategy he or she wants and after a period of usually 15-30 days the demo accounts are all closed for trading and the person with the highest balance wins. On today’s post I want to talk a little bit about the many problems and dangers of these demo accounts and what their final intention really seems to be. I will also point out some of the rules that would be necessary to make a more “realistic” demo trading contest and eliminate many of the problems these contests are now facing.

So what is wrong with these contests ? At a first glance, they seem to be a very good idea. People are able to win REAL money by trading paper money. Anyone can win a cash price without having to risk a penny of his or her own money. You don’t have anything to lose. This is a big part of the problem !

Besides the usual problems with trading contests (either live or demo) which are done on very limited timeframes, demo contests have additional problems due to several aspects which are not present when trading live accounts. First of all – when trading paper money- no one has anything to lose, reason why people are encouraged to trade in a VERY risky and unsound way since they only have a lot to win. This is the exact same problem many traders face when they change from demo to live accounts. Many traders make a lot of money on demo accounts and then these strategies actually make them wipe their accounts in real trading in the medium term. The problem is that excessive risks are being taken, strategies which can work in the short term but fail to work in the long term are responsible for all these facts.

Then we have the problem of the accounts being demo and not live accounts. What does this mean ? Well, basically it means that several strategies which are bound to be completely unprofitable in live trading can be used to win a demo trading contest. Since requotes are rarely seen on demo accounts (and spread widening does not exist) , it will be very easy to profit from extreme scalping strategies which would fail dramatically under live testing conditions.

So what does a demo trading contest tell you ? Nothing. These contests simply reward the person who took the boldest risk or used the strategy which exploited live/demo differences to the greatest extent. It does not reward people who have sound trading strategies or people who use conservative money management, it rewards reckless and unsound trading with tactics that would fail with almost certainty under extended live trading conditions.

What is the objective of these contests then ? I think that there are several things which brokers win when making up these contests. First of all, they get publicity since traders are bound to tell others about the contest. Then we also have that the people who win or the people who get profitable results in these contests will fund live accounts and trade the same strategies as they did on the contest, effectively making money for the brokers in spreads. Since many of these tactics are bound to trade with very high frequency, the brokers win in the sense that they are stimulating the use of this type of trading. They are also possibly able to market the strategies used by the winners of the contests, even though they use very unsound and risky trading tactics.

Well, what I see there is some easy money available to be won with absolutely nothing to lose, within the next few months I will participate in as many of these demo contests as I can find and I will describe to you the extremely risky and unsound tactics I will use which, if they work during any contest’s testing period, will make my accounts “explode”. It is also worth mentioning that these contests are repeated in a monthly or bimonthly basis by most of these brokers, making the possibility to win even one contest every one or two years realistic.

If brokers would like to reduce the use of unsound trading strategies and provide “better” demo account contests they would have to use a “live simulator” which would have to introduce requotes, spread widening, off-quotes, etc (this software was in fact created by metaquotes for the first robot trading tournaments) and they would also need to increase the testing time to at least a year (to make all overly risky strategies fail) . With this in mind brokers could indeed stimulate the use of consevative money management and sound trading strategies instead of very risky trading strategies or merely strategies which attempt to exploit demo/live testing differences.

If you want to learn about sound trading tactics and how systems have to be built to withstand changes in market conditions and achieve long term profitability please consider buying my ebook on automated trading or joining Asirikuy to receive all ebook purchase benefits, weekly updates, check the live accounts I am running with several expert advisors and get in the road towards long term success in the forex market using automated trading systems. I hope you enjoyed the article !

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