Practice makes perfect; this is the sole idea behind demo trading but is it really worth it? Forex trading is a highly risky venture and as a newbie, you will definitely need a lot of practice to have a feel of what the market is like.
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Demo trading is the best way to start with any kind of online trading without having to risk your hard earned money. For some traders, demo trading is a waste of time and for others, it is certainly not. However, if you are like me, you would sit on the fence.
Demo trading serves two main purposes; for newbies to practice to perfection and for experienced traders to test strategies, or go back to the drawing board to right some wrongs.
What demo trading will teach you.
Trading forex is all about decision making. You make the right move, you end up with profit and if you make the wrong move, you end up with a loss. There’s no way to know about the verdict of your decision until the results show.
For newbies, it is always good to start with demo trading. This way you get to make both wrong and right moves without losing any sleep over fake dollars. That way, you are able to navigate your trading platform and learn how every panel works with less worry.
With a demo account, you would be able to have a feel of live market conditions without risking your hard earned money. It is somewhat a flexible and reliable way to start your forex trading journey; because making mistakes on a demo account is free.
As a newbie, you would be prone to making a lot of avoidable mistakes in this highly risky venture. Starting with demo trading would however eliminate the fear of losing as well as a lot of psychological barriers.
Trade management is one of the simplest things in trading but it gives beginners a tough time. It takes demo trading for you to familiarize yourself with trade management as a beginner. It involves placing trades, setting stop loss levels and setting take profit levels.
Whatever strategy you have learnt can also be tried, tested and perfected on a demo account without risking anything. This is true for newbies and experienced traders alike. Technical analysis concepts like trend lines, support and resistance, channels, chart patterns can all be tested on a demo.
What demo trading will not teach you.
I am afraid to say, that a demo trading account falls short. This is in the sense that it does not teach you all that there is to know in the forex market. There are three very key aspects of trading and these are trading strategy, risk management and trading psychology.
Practicing on a demo account will help you with testing any trading strategy and putting risk management to test as well as some other basic things in forex trading. What a demo account will not assist you with so much is trading psychology.
When demo trading, you are making use of virtual funds which you have not sweat for; and this is why it is not a good measure of trading psychology. Others may argue that they can still have a psychological feel with a practice account but it is highly debatable.
When your money is on the line, there is a high probability that your emotions will be fully involved and that could be very detrimental. Profits may evoke happiness and losses may evoke pain; but neither of that emotion is felt when practicing with virtual funds from a broker.
FUD (fear, uncertainty and doubt) falls under trading psychology. If you have an issue with any of the three, your success in trading will be delayed.
Even as forex trading is a highly risky venture, it has a big potential to take an emotional toll on you especially when things are going south. For this reason trading psychology remains a key aspect to trading success.
Do this rather!
In order harness your trading psychology as a newbie, you need to take a bold step and move from a demo account; this should be done only after familiarizing yourself with the basics perfectly. Also make sure you have a tried and tested strategy as well as a deep understanding of risk management.
With all the above checked, you then have to deposit some small amount of money to have a taste of what risking real money is like within live market conditions. A small amount of money because you are still in the practicing or testing stage.
This is most likely going to show you how you would react; if you ended up with a profit or loss after trades. Trading psychology is all about knowing about your emotional make up when your money is on the line. Testing it with a small account will help you recognize your strengths and weaknesses and make tweaks where necessary.
One helpful thing about transitioning from a demo account to a live trading account with small capital is that; you would treat the live account with much seriousness than the demo. This is arguable, but many traders do not maintain the discipline for long enough on a demo account after they have understood the basic concepts.
NB: Follow this order: Demo trade – Go live with small funds – Go live officially.
Helpful demo trading tips.
As a beginner, when opening a demo account; make sure that you will request for funds that would be in proportion to your account size if you were to go live. For instance, if you would be going live with 500 dollars do not open a demo account of 100 000 dollars. This will prevent you from making a costly mistake like trading big lots on a small account.
Also, when starting out, spend adequate time on a demo account before transitioning to a live account with small funds. Trading is a serious business and understanding your trading platform is just the beginning. Make sure you understand almost everything on your trading platform; before moving to understanding what trade management, trading strategy and risk management are.
Adequate time on a demo account in my books is anywhere between one to three months. After that window, you can make the move to a live trading account with a small capital to harness your trading psychology. It is the toughest of them all since your money will be on the line.
As we come to the end of this lesson, one thing I would want you to note is that; you should treat trading as a business not a hobby especially when starting out. Spend enough time practicing so that when you go live finally, you would do so with adequate conviction. Your queries and comments are welcome in the comment box below.
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