Why demo accounts are the perfect place to trial your trading strategy

If you’ve ever competed on the pitch, you’ll know that sporting successes all come down to practice. You spend 75 per cent of your time preparing, and 25 per cent actually on the field trying to score.

In that sense, sport and foreign exchange (forex) trading are a lot alike. Both need epic skills, held together by an intelligent strategy. You need both to react quickly when markets put you on the back foot and to know when you can transition back to offence and attack. Plus – forex operates 24/7. Every day is match day.

Happily, forex traders have the luxury of honing their skills with real-time data and analysis, but without putting real money at stake. Using a forex trading account, they can take their trading strategies and test, refine, and test again before battling their wits against real price movements.

Most online forex brokers provide free demo accounts so prospective new clients will give their platforms a go. Whether part of a sales pitch or not, demo accounts offer an invaluable opportunity to try trading in accurately simulated real-world conditions.

Getting the mechanics of managing positions and understanding the behaviours of markets takes more than just kicking the tyres. You’ll need to become familiar with all the standard instruments and risk management protections while experiencing a wide range of trading conditions.

Some demo accounts expire after a time while others can be used indefinitely. The best brokers let you download and install your own version of a popular trade execution platform like MT4 after registration, either on mobile or desktop, and very often both.

When you’ve crammed up on trading techniques and your strategy starts to take form,  having a demo account gives you a place to test it. You can see how your approach stacks up against real market data.

Demo accounts are the launch pad for forex trading success. Here’s how to test out your trading strategy and see if it’s battle-ready.

Forget it’s a simulation

Demo account trades are fake, but you should approach each trade as though your real money is on the line. Remember – the virtual environment of the demo account uses real – and real-time market data. If your demo trades succeed, they would likely have succeeded in real life too.

Once you’re up to speed with a broker’s online platform, use your demo account to experiment with different strategies.

Along with getting better at reading the market, you’ll also gain a more unobstructed view of your emotional state under the stresses and excitements of trading. This is important because emotions often drive trading decisions, for better or for worse.

Some people can brush off a big loss and put it down to experience. Others might find the experience crushing and rush to make other compensating trades without adequately thinking them through.

Demo-proof your ideas

Demo accounts also let you make deliberate mistakes to work out the bugs and expose any weak assumptions in your trading strategy. Test the strategy along three vectors:

  • Currency Pairs: Choose 2-3 majors to start with, perhaps like USDJPY or EURUSD.
  • Time of day: It’s best to be active in the same daily time slot each day to understand the rhythms and moves that dominate the session
  • Risk management: Try the different mechanisms to minimise the risk of trading losses see which ones suit your strategy best.

Complete a minimum number of demo trades

As a rule of thumb, new traders should aim to complete fifty demo trades before moving to real money trading. That will provide sufficient time and experience to hone trading skills and see how a strategy performs.

Before putting cash money at risk, a trader should know how to set up a stop order, the broker’s spreads for each instrument, and the options for funding.

Log your gains and losses

Knowing when you’re ready to go live is a judgement call, and it’s down to each individual to decide when to make the leap. If you feel confident about your abilities, however, the decision gets easier.

That’s why tracking your virtual trading results each is vital to progressing from newbie to novice and beyond. Writing your wins and losses down and reviewing them later will show you if you’re improving or if you’ve stalled.  It can also help you spot any areas where you need to get better.

No trade will ever be identical – currency markets are too changeable. But logging trades and outcomes can show you what you’ve done well, or bring to light a significant trend you might have missed.

Pretend the taxman cometh

Forex trades happen between counterparties around the planet, and the requirements of tax reporting are different in every national jurisdiction. In some countries, brokers need to provide granular detail of all your trades. In others, brokers aren’t required to report your activities at all, so it’s entirely down to you.

When tax reporting is your responsibility, you’ll need a broker that offers useful reporting functions with enough detail to include in tax filings.

Some traders execute thousands of trades annually.  Your time on the demo account will tell you if your broker can output activity reports in an appropriate format.

Taking your demo-hardened strategy live

With enough trades notched-up and a strategy to apply, it’s probably time to leave simulated trading behind and sign up for a real money forex trading account.

Demo or live it’s still essential to set goals. You might target an initial objective of hitting eight to ten per cent of the account balance or get through 2-3 months of profitable trading.

Rather than leaping into the deep end, you can also go forward by taking baby steps. Make your initial trades in small cash increments. For many people, that’s a natural next step when leaving demo for the real world.

Sharpening your FX trading strategy by working out the glitches in a demo account will make the shift seem effortless.

About Retire Early Lifestyle

Billy and Akaisha Kaderli retired three decades ago at the age of 38 and began traveling the world. As recognized retirement experts and internationally published authors on topics of finance and world travel, they have been interviewed about retirement issues by The Wall Street Journal, Kiplinger's Personal Finance Magazine, The Motley Fool Rule Your Retirement newsletter, nationally syndicated radio talk shows and countless newspapers and TV shows nationally and worldwide. They wrote the popular books The Adventurer's Guide to Early Retirement (Your Simple Path to FIRE) and Your Retirement Dream IS Possible.
This entry was posted in All Things Financial, Guest Blog Posts, Legal Matters and tagged . Bookmark the permalink.