The Demo Trading Account is the best resource for anyone who is new to Forex Trading. Think of it as a flight simulator for traders. It allows you to practice flying in a completely safe, risk-free environment before you ever take off with an actual plane. It’s a great chance to learn, but best of all, it’s free to use.
That said, to get the most out of your practice time, you need to use the practice account correctly. Many new traders make a few mistakes while using their demo accounts, which can decrease the actual value of the experience. This guide will examine the 7 most common mistakes to avoid and offer suggestions on how to use the demo account the right way. Using a demo account the right way can develop the experience and confidence necessary for real-wrold success.
Mistake #1: Treating It Like a Game
The major mistake is not actively treating your practice as if it was real. Because the money’s not real, most people play around in their Demo Trading Account like its a video game, taking giant and unrealistic risks that they would never take with their own funds.
The solution is to act like it’s real money from Day 1. Use the same risk management rules you planned to activate once you go live. Just with that small change in mindset is the first step in not falling victim to some of the major psychological errors soon thereafter.
Mistake #2: Using an Unrealistic Account Size
Most demo accounts will quickly set you up with a large virtual account, maybe $100,000. While trading with an account of this size is fun, it is not realistic. If you are going to start trading live with $1,000, trading with $100,000 will not teach you anything about how to manage a small account.
The Fix: Change your paper trading account balance from a large amount to a more realistic amount. If your plan is to deposit $500, adjust your demo account to $500. This is much more valuable in a simulation as it also prepares you for how you would manage a small account if that was what you started with.
Mistake #3: Forgetting About Trading Costs
When using a live account, every trade contains a minor cost (the “spread”). In a demo account, it’s easy to disregard these costs because the money isn’t real. This can lead to an unrealistic perception of profitability.
The Fix: Focus on your spreads for each of your trades and look at how they affect your outcomes. An important aspect of your strategy testing should be whether or not your strategy is still profitable when the costs are accounted for.
Mistake #4: Not Having a Trading Plan
A frequent mistake is just clicking both buy and sell randomly with no rules – a Demo Trading Account isn’t gambling, it’s practicing a system.
The Fix: Before you even consider placing a trade, write out a simply trade plan. Your plan should include rules on when you’ll enter a trade, the position of your stop-loss, and when you’ll be taking profit. Use your demo time to stick to this plan.
The Right Broker Makes Your Practice Better
A great demo trading account experience begins with a great broker. It’s their technology and platform, that help make your practice worthwhile and feel real.
- The platform should be user-friendly. Brokers such as Capitalix and SmartSTP are excellent for beginning traders, because their platforms are straightforward and simple to use, making it simple to trade with caution.
- To properly test your trading strategy, you will want a fast and reliable platform. The brokers FX Road and Trade EU Global give you a strong demo account environment that matches their excellent execution on live trades.
- As a professional trader, they will want to practice for a long time with much more features and tools. This is what can be done with demo accounts from brokers such as CapPlace and the ECN broker FirstECN, who will let you use their entire professional suite of apps and tools to practice your strategy effectively.
- Innovative technology will be particularly enticing for your practice trading. Modern brokers, such as SuxxessFx, Tradgrip, and Algobi each have items you can try out in their free trading environment.
Mistake #5: Ignoring Trading Psychology
This is a significant factor. A demo account is a great technical simulation, but you cannot reproduce our real human emotions. The fear of losing money in the market, the greed to hold on to a winning trade, all of that is a powerful component of trading that you only feel when you are actually in the live market.
The fix: Acknowledge this limitation. If you paper trade, keep a journal. After every trade, write down how you think you would feel if you had made the trade with real money. Were you nervous? Were you tempted to close the trade early? Being honest with yourself will help you prepare psychologically for those future times when you make errors due to psychological constraints.
Mistake #6: Not Testing All the Features
A lot of traders just use the buy and sell buttons on their demo account and lose out of valuable learning about all the tools the broker has available at their disposal.
The Solution: Take advantage of your demo time to go through everything. This is a great opportunity to start learning how to place different types of orders (e.g., limit orders and stop orders). Additionally, test out all the charting tools and indicators available. You may even want to ask the broker a question (this serves to both learn about customer service and test their execution capabilities) while in your demo account, just to test out the platform and themselves in real-time.
Mistake #7: Staying on the Demo for Too Long
A Demo Trading Account is a great tool, but it can also be a comfortable place. Some traders get so comfortable with the risk-free environment that they get scared to ever trade real money.
The Fix: Set your goal. For example, say to yourself, “I will use this demo account until I am consistently profitable for one full month.” Once you accomplish the goal, it’s time to move to a small live account. This is the only way to experience and master the trading psychology, for real.
Conclusion
A Demo Trading Account is like your personal training gym! It is your chance to work on your skills, enhance your strategy, and prepare for the big leagues. By steering clear of these seven pitfalls, you will ensure that your practice time is expensive.
While using your demo account, be smart. Take it seriously, be fake, and deliver on your plan. If so, you will be on your way to building a strong base for your long and prosperous trading career.
FAQs
- What is a demo trading account?
A demo account, also known as paper trading, is a practice account offered by brokers. It uses virtual money but real market data, allowing you to practice in a 100% risk-free environment.
- How long should I use a demo account?
There is no perfect answer, but a good goal is to practice until you have a solid trading plan and can be consistently profitable for at least a month.
- Why is it bad to practice with a very large virtual balance?
It teaches you bad habits. Managing a $1,000,000 account is very different from managing a more realistic $1,000 account. It’s best to make the simulation as real as possible.
- Can a demo account prepare me for trading psychology?
Not completely. It cannot simulate the real fear and greed of live trading. However, you can prepare by keeping a journal and being honest about the psychological errors you might make.
- What is the main goal of using a demo account?
The main goal is strategy testing and learning the broker’s platform. It’s your chance to make all your beginner mistakes without losing any real money.