Do You Need to Use a Forex Demo Account?

Do You Need to Use a Forex Demo Account?

Beginner traders are often recommended to start with a forex demo trading account before risking real money on a live account. However, there are also many who question whether this step is necessary as demo trading has several stark differences with live trading, particularly in the trading psychology aspect.

Despite that, demo trading is a good way to practice one’s newly learned trading skills without the risk of losing real money. It is also an effective method of putting a new trade strategy to the test and monitoring its results before making adjustments. While demo trading does not exactly replicate the emotions and stress involved in live trading, there are several ways to make the most out of this experience.

The main difference in demo trading and live trading is that the latter typically has more pain involved when one loses a trade. Not only did you have a wrong or poorly implemented trade idea, but you also lost real money in the process. When it comes to demo trading, even though there is no real money involved yet, you can try to feel the pain by coming up with real-life penalties when you lose a trade. For instance, you can have a small jar wherein you put a dollar for every lost trade so that you are reminded that trading decisions have a real money aspect tied to it.

Another way to make the demo experience feel more like live trading is to assign grades to each aspect of the trade. You can evaluate your entries and exits, whether you were able to press your advantage or cut your losses, or if you stuck to your risk management rules. Deductions can apply if you gave in to emotions and deviated from your plan in the middle of volatile market movements. From there, you can be more conscious of your decision-making and apply the same kind of self-assessment when you are trading live.

Bear in mind though that the temptation to give in to fear of losing or greed is much stronger when real money is on the line so it is important to master this aspect of trading psychology on a demo level then simply repeat the process even when real money is being traded.

As discussed in the earlier section, it is crucial to keep a trading journal even as you are trading demo. This way you can easily identify your usual mistakes and weaknesses, then be able to work on them before transitioning to live trading. You can list your emotions involved when you make a trade decision or change in plans, then be in a better position to evaluate if you made the proper action or if you just had a panic reaction.

When you are able to take the leap and start trading live, just remember all the lessons you learned in demo trading and don’t be too overwhelmed about risking real money.

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Samuel Rae is an active retail trader across a variety of assets, including currencies, stocks and commodities and the author of Diary of a Currency Trader (Harriman House). His personal strategy focuses primarily on classical technical charting patterns with a fundamentally supportive bias, combined with a strict, risk management-driven approach to entries and exits. He is an Economics graduate from Manchester University, UK.