Practice forex trading – demo accounts

This is a part of Forex trading for beginners tutorial. You can Download the whole tutorial as pdf here (right click and save as).

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It is hard to make profit in Forex that is why practice is so important. You have now many options to practice your trading skills and learn to trade.

OK, but what is best? Do you need trading simulator? Paper trading is a good way to start – not real paper but with help of demo account of course.

We talk about paper trading when you are trading with virtual money. Years before simulators you simply put trades on a piece of paper. When you felt ready to trade on real account, you made a switch. In 1930’s it wasn’t that easy to open brokerage account, besides fees for opening and closing trades were also high. Paper trades were good solution – you could learn how to trade without losing real money.

Demo trading in Forex

Now when we are talking about paper trading, we mean trading on simulators. Of course, you can use pencil and paper, but trading on simulator is much better way to go. You can easily open a demo account and get access to trading platform so you can test it. Your demo account is funded with virtual money and you can place orders.

The main advantages of Forex demo trading

  • you do not put at risk real money – yours loses and gains are virtual, so there is no risk that you will lose all you trading capital
  • you can test your trading system and different trading strategies
  • you can see how to use leverage
  • if you are using mechanical system, you can test it in practice

The main disadvantages of demo trading

  • you do not put at risk real money – you react different when it is real money you are losing
  • you make trades that you normally wouldn’t make with real money

Is paper trading a good way to learn how to trade?

Generally, yes. If trading Forex is something new for you or you want to test totally new strategy then yes, it is ok.
I would say that demo trading is very important when you want to start trade on Forex. As you know, on currency market we use leverage. There are different position sizes. The basic one is 1 lot. You can open position as big as couple lots (for example 5 lots), or position smaller then 1 lot – this will be micro lot or nano lot. If it sounds not familiar, then you have to test it on demo account. Thing is, with leverage it is very easy to blew whole account in matters of few minutes. It is crucial to master how to manage position size and understand well how it works. Leverage can be your best friend or the worst enemy.

When you are building mechanical trading system, then it is also great possibility to test it on demo account. So again, demo trading in that case is not that bad.

In a long term, demo trading is not the way to learn how to trade. You should switch to real account with small funds. Why?

Because of…

Trading and psychology

When you are on demo and you switch to real money trading, you will notice difference. Now you care. When you are losing money, you feel fear. You hesitate to close losing position “because it may turn around” (yeah, it always does 😉 ). When your trade is in profit, you are greedy. You hesitate to close position, because it may go even higher. Hell, this may be a trade of your life.

This kind of emotions occurs only when you are trading with real money. You will learn over time that most of your loses come from not following trading plan and allowing emotions to play too big role in your decision making process.

You are not able to switch off your emotions. On the other hand, you must be aware of them and not allow to take control. That is why you need to have your trading plan on paper. Write down as many things you can in your trading plan – that way you will minimize impact of emotions in your trading.

Ok, so let’s see where demo trading is in trader education process.

Demo trading in trader learning process

1. Open demo account
2. Build strategy and trading plan
3. Test different position sizes – add to trading plan size of positions. Test different currency pairs, different time frames.
4. Test your trading plan – set goals such as do not lose money in next 3 months etc.

When you are profitable on demo:

5. Open real account
6. Fund account with money you can afford to lose
7. Set realistic goals and trade according to your trading plan
8. Trade smaller positions!

When you are profitable:

9. Increase position size

Menu for Forex trading for beginners tutorial

Part 1. Introduction to Forex trading Part 2. Trading tools Part 3. Money and position management in Forex