Why Demo Testing a System is NO Good : Five Reasons Why You Should Always Test Systems With Real Money

When using mechanical forex trading systems – especially those that have been automated – people tend to go through a testing “cycle” which first includes testing on a demo account to a lesser or greater extent. The objective of this “pretend testing” of a trading strategy is merely to determine if the system is “good enough to trade with real money” or if the system is simply not worth testing in a live account. However demo testing usually carries with it many additional problems that make the testing of systems – beyond the confirmation of adequate programming – simply an overall waste of time.

Within the next few paragraphs I will share with you why I believe demo testing is a waste of time and why live testing – on an account with real money – should be the first long term test done on the performance of any trading system. I will talk about the inherent problems of demo trading and why the information demo trading gives is far inferior and far less credible than that of a live account. These are the five reasons why you should NOT use a demo account to test an automated trading strategy (besides short tests to confirm correct programming) :

1. Demo accounts do not have execution problems. The real market has real liquidity depths and real trading limitations which are simply not evident on a demo account. Most brokers make demo accounts very transparent and swift regarding order execution reason why some strategies may “shine” in demo while they may fail horribly in live testing. Therefore, the testing through real live execution “problems” is vital for the correct evaluation of a strategy.

2. Demo accounts usually use the “best spread” of the broker. When you open up a demo account it will use the best possible spreads available from the broker you are using and this often leads to a strong underestimation of trading costs, especially on brokers that have different account types with fairly different spreads. In Alpari UK – for example- the spreads you use on a demo account will be the Pro account spreads which are far better than those of the smaller accounts.

3. Demo accounts expire. Perhaps one of the worst problems of demo accounts is that they usually expire because the amount of server space a broker can allocate to demo accounts – which are just an expense- is limited. This means that running continuous tests for long amounts of time will be impossible and you will have to restart the account with the previous account balance, etc. Often trades will be missed and the overall execution will not be that accurate.

4. Demo accounts lose their history. This is a big problem -and a direct consequence of the above mentioned expiration – which causes you to lose the account with all its trading history. You are wasting your time here since you are not able to use the trading history as a way to build up the track record of your trading strategy. It is a complete waste if you managed to trade a system profitably for 6 months but then the account was deleted and no real evidence of its performance remains.

5. There is no psychological pressure. Perhaps the largest reason why a live account should always be used is because trading through draw down and profitable periods in demo accounts is extremely easy while this might not be the case for a live account. Demo accounts greatly underestimate emotional issues which are common when using automated trading systems. Using a demo account protects the user from the psychological effects of draw down periods, something that will not happen when trading the account with real money.

In the end demo accounts are a useful tool for the short term evaluation of a trading strategy’s programming, to ensure that the strategy is being executed correctly and no large or important errors are present. However – beyond this initial testing – the evaluation of any trading strategy should be done in a live account due to the problems I have mentioned above. Most systems can be tested on 100-200 USD forex cent accounts which will offer a real world test without involving a lot of money.

So next time you want to start evaluating a trading strategy do so in a live account, in the end the real execution, the real spread and the permanent trading history and building of your emotional experience will be worth the initial – yet very small – minimum cash investment. If you would like to learn more about automated trading system and how you too can build your own likely long term profitable strategies please consider joining Asirikuy.com, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach automated trading in general . I hope you enjoyed this article ! :o)

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2 Responses to “Why Demo Testing a System is NO Good : Five Reasons Why You Should Always Test Systems With Real Money”

  1. JT says:

    Thanks for the post Daniel,

    I typically like to see that the code is working as intended for a month or two. But like I believe you have inclined, proof of profitability lies solely in the live account test. My first EA Tiger Tail was a good test for me when I put it in a live account. Being it is on a daily chart and TP is 40 or more pips, I did not see too many differences other than entry points were not the same as demo, as they can be off several pips. The big things I found were live trading errors such as re-quotes and no bid or ask data. Another big discovery for Tiger Tail was the weekend gap behavior in a live account.

    Good post.


  2. admin says:

    Hi JT,

    Thank you for your comment :o). Certainly, demo trading is an invaluable tool to evaluate the accurate execution of code but – beyond that – it falls short to give realistic impressions about long term profitability. Another big issue for me is the fact that demo accounts are not permanent but constantly deleted something that prevents the building of a track-record. This is absolutely necessary for any serious trader. Of course, it is always surprising to see how much a strategy can change between demo and live execution, even when strategies – like daily trading systems – appear to be more “immune” to this transition. Thank you very much again for your comment JT !

    Best regards,


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