With the introduction of online trading brokers in the early 00”s many new tools began to surface which helped people trade more effectively.
One of these tools is demo trading.
Demo trading is way for you to try out any trading method you have learned using real market conditions, what I mean by this is all the steps you must make to trade using real money are repeated when demo trading. For example all the charts are the same, placing and closing trades is the same basically everything is the same apart from the fact your using fake money instead of real money.
This is invaluable if your just starting out because it gives you an opportunity to learn the in’s and out’s of the brokers trading platform which, to a beginning trader, can be quite confusing to understand and figure out. Additionally demo trading allows you to learn how to place trades, set stop losses, close trades and take profits without the risk of losing money.
When I first started out trading forex there wasn’t any demo platforms available to practice trading on so me being naive and stupid I decided to jump headfirst into live market conditions not knowing how to do anything. On my very first trade I lost almost £300 which at the time was half of my total account balance.
Needless to say after this set out to learn as much as possible about the markets before placing any more trades.
The Big Difference Between Demo Trading And Live Trading
Some people argue as to how long new traders should spend demo trading.
Their argument lies in the fact that although demo trading simulates real trading conditions very well the effect of losing and making money is very different when demo trading compared to live trading.
Losing money when demo trading has almost no effect on your psychology, when losing money in live conditions however the effect it can have on you can be dramatic, because when you lose money whilst demo trading it doesn’t mean anything to you, you have no attachment to that money because it’s not real.
When trading live you have a real connection to every loss you make because your hard-earned money is now at risk, people do not like losing money, me included and coping with making and losing money is a psychological skill you will need to become very good at mastering in order to generate consistent profits from forex trading.
Another often neglected use of demo trading is restoring confidence.
If you’re not doing too well in the markets and have had a sting of losses then sometimes it can be productive if you go back to demo trading for a while to regain proper focus.
How Long Should I Demo Trade For?
This is a tough one because each trader is different, some people will learn at a faster rate than others which means they should be able to start live trading sooner, on the other hand though I think anyone that’s new to trading should spend at least 2 months demo trading before moving on to live markets, by this time you should have a decent understanding of how to place and manage trades as well as having gained some experience in actually trading different currencies.
In the end its up to you, if you feel like you’ve learned enough to be able trade live markets profitably then by all means put some money in an account and start trading, if you still feel a little bit uncomfortable with live conditions stay on demo and practice, with due time you’ll feel confident enough to make the transition from demo to live.
Make It As Real As Possible
If you do decide to trade on demo you should do so with the same methods that they plan on using in live trading.
The best thing I suggest you do is make a trading plan based on the trading method you plan on using in the market, making sure it contains things like how much you’re going to risk on each trade, when to close trades, and any other rules your planning on going to use for trend direction and entry.
Once you’ve done this you should start demo trading but treat it as if you were live trading
This means only taking trades that meet the parameters you wrote down on your trading plan. The amount you risk on each trade should be the same, the things you look for which constitute to a trading opportunity should stay the same as well.
By doing this your replicating live trading conditions as closely as possible which will make you better prepared for when the time eventually does come to trade live markets.