Online FX Trading Brokers | Currency Trading Brokers | Demo-Trading vs. Live-Trading

Demo-trading results suggests to you that you have finally stumbled across a Forex trading system that rocks. Congratulations! But now what?
"Handling the good idea" can be difficult at best, so I suggest that you halt a moment to contemplate whether the trading system is really that good.

  • Does your system use sound principles?
  • How did you backtest your trading system?
  • How good is your backtesting platform?
  • Can your backtesting platform really provide information that is good enough to base an expectancy on?

I have to admit that I learned a lot about backtesting the expensive way. More than once I was happy with backtesting results and then was getting dismayed about the real trades that ensued. Does this sound familiar? It may not be your fault, read on:

Demo Trading vs. Live Trading - a reality check

There is a significant difference between demo trading and live trading. With multiple MetaTrader4 accounts I gathered a lot of negative experiences and started to research the topic, which - incidentally- is something I should have done way before I committed any cash - and so should you...

The single most important fact you need to be aware of is that brokers offering demo accounts have an infrastructure that ALWAYS honours demo trade orders - be it a buy or a sell or a close position, whatever. Each and every time you fire an order on a demo platform, it gets executed, no matter what the market is doing, how volatile it happens to be, whatever. Your equity curve will not reflect diminishing liquidity, extreme volatility, etc.

Retail Forex Brokers come in flavours

In the real world, there exist two main type of brokers:
- those with a dealing desk of their own
- those that have no dealing desk of their own.

In the first case, you're actually trading against another trader that is employed by your broker. He is your liquidity provider. Such a broker takes market positions (yours!) and in doing that takes on market exposure (also called 'risk'). To limit these risks such brokers hedge the consolidated open orders that their client base may have, as this would be his risk exposure. These hedge positions are taken on fixed intervals (in between less than 10 seconds up to mulple minutes). Brokers that hedge their market exposure in long intervals are the ones that don't like it all that much if you're a scalper. There is nothing wrong with brokers that merely hedge their market risks. The problem is: if they're trading anyway, why not let your trades eek out a higher profit as well. This is how it is done: they potentially put you at a disadvantage by stalling orders, by enforcing requotes, etc. With these brokers you'll find that positions are much more easily closed when you're in a minus-position. Go figure...
Bottom line: They screw us...

In the second case - the non-dealing desk brokers - your order gets passed on to their liquidity providers. Theoretically these brokers have 10-15 liquidity providers (major banks and/or other large corporate entities). The software on the broker side matches all price information of their multiple liquidity providers. The best bid/ask combination is then quoted to their clients - that's us. Now, if you place an order and the order gets passed on to the most suitable liquidity provider, very often you'll find that the bid- or ask price originally quoted by that liquidity provider is no longer valid. Result: requotes / off-quotes again, or a temporary increase in spreads at best. Here too we're being screwed, as my experience with one major non-dealing desk broker (FX**) clearly shows that orders that were generated automatically (by a robot) got filled less than 10%, whereas if I placed these very same orders manually (by trading the error reports in the trading journal of the robot, for crying out loud...) I get more than 90% filled (which is lacklustre at best too...)

Conclusion: retail traders get screwed either way

Now, what does this mean for our trading?

And what if I'm forced to first grow an account on the FX spot market?

In my opinion it is futile to try and trade an automatic system on the very short time frames, as each and every spot market broker potentially does things like widening up spreads, returning requotes, etc. All of this invalidates the expectancy you gained from backtesting.

Only when doing something on a longer time-frame, automatic trading may work, as here it is not that important to get filled at exactly the quoted price.

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