5 Reasons Why Forex Newbies Should Demo Trade
Many people who are drawn into the allure of the trading world jump straight into the deep end and put their hard-earned money at risk.
If you think about this logically, it doesn’t make much sense. Would you perform heart surgery without any knowledge or practice? Would you do a backflip on a bike without ever riding one? Would you design a bridge without studying engineering?
I’m sure the answer to all of these is a resounding no. What I’m saying is, you shouldn’t start trading Forex (or any other financial instrument) without researching and practicing first.
Thankfully, newbie Forex traders have access to plenty of educational resources to gain knowledge on the subject.
They even have the opportunity to practice, test, and become familiar with the market through demo trading.
What is demo trading?
Brokers offer a demo account to test their trading platform and trade actual market movements on an account funded by fake money. All data is actual, but no money is at risk. Instead, profits and losses are calculated based on lot size and price movement.
This provides traders with the opportunity to participate in the Forex market at real prices without putting any money at risk.
Now that sounds great, learning without losing any real money, which brings us to this article’s point, why should rookie traders start with a demo account?
1. Have an opportunity to develop a trading strategy
Trading without a positive expectancy will eventually result in a loss of all trading capital. Obviously, this is the opposite of reaching financial freedom, which is why most people begin trading.
Starting on a demo account allows you to test out different methodologies and see which one suits you best.
Are you interested in how news and economics affect currency prices? Then you should probably be a fundamental trader. Do you prefer following a strict set of rules? Then technical analysis would suit you better.
The only way to find out what you are attracted to is to try it out, and there’s no better way to do that than on a demo account.
By analyzing market movements as they occur, you will also begin developing a feel for price action, which builds much-needed experience.
Going a step further, once you determine the type of trader you will be, the next challenge is developing a strategy. Nobody should be participating in any financial market without a set of rules and trading processes.
Demo accounts allow a trader to test out ideas without putting any real money at risk. They can determine if a strategy is profitable before trading live (with real money).
2. You learn more about risk
An excellent trading strategy is nothing without proper risk management. Practicing money management techniques as the market moves is essential when a trader starts their journey, and demo accounts provide that platform.
To name some risk management aspects that a beginner needs to learn:
As you can see, it’s quite a long list (and that’s not everything) but learning all of these is not that difficult when put into practice.
Although you will only find your true gauge when trading real money, you will also get an idea of your risk limits that you must stay within to prevent your emotions from getting the best of you.
3. Gain an understanding of probabilities
Why is this? Because you cannot win all the time, your system will inevitably go through periods of drawdown. These periods do not necessarily mean that your system is broken. Instead, it is a series of losing trades that are in line with the probabilities.
Knowing this will allow you to continue executing your plan during bad times, and by staying true to your strategy, you will eventually have a winning streak that will pay for the losses and put you into the green.
By jumping onto a demo account and trading a system, you will see probabilities playing out and learn from that.
4. Become accustomed to the psychological challenges of trading
This point comes with a major disclaimer – The emotions that anyone experiences on a demo account will never be as severe as those on a live trading account.
But you will at least experience the psychological obstacles that come with trading any financial market, even if it is not to the full extent.
You will notice yourself becoming hopeful on losing positions, greedy on winning positions, fearful of opportunities, feeling the pain of missing out.
These are just some of the emotions that can blindfold you from what is actually occurring in the Forex market and prevent you from following your plan.
Testing yourself out with fake money will give you the first glimpse into your weaknesses and the errors you may make when live trading. Therefore, you can prepare ways to deal with and prevent the same negative behavior from occurring.
5. You can master your trading platform
One of the main reasons that brokers offer demo accounts is so you can test out their trading platforms.
Each of these has different tools and operations that you should know off by heart before putting your money at risk.
I don’t want to hear about anyone accidentally trading 100 lots because they never tried a platform out before or how they forgot to set the stop loss because some other software did it automatically.
It goes without saying that new traders want to hop into the live markets ASAP because they are excited to start trading Forex.
While I can understand this feeling, excitement doesn’t make money. Knowledge, practice, discipline, processes, and strategies are the drivers of profitability. Trading on a demo account will allow you to start developing all of these necessary components.
Good luck on your journey.
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