Demo trading is an indispensable aspect of every retail trader's career. It would be foolhardy to trade 'live' in the Forex market without first getting your feet wet with paper trading.
What Is Demo Trading?
Demo trading (or 'paper trading') involves normal trading activities such as entering into buy (or sell) trades, setting stop orders, and exiting the market. It's basically the same as actual trading except for one crucial difference: you're not trading with real money.
Most Forex brokers provide this service at no cost to retail traders because they hope the retail traders will move on to using their paid services when ready to 'go live'. The brokers will typically provide you with a demo trading account where your winnings (or losses) are calculated, and also a trading platform for you to monitor the market and to place your trades with.
Why Is Demo Trading Recommended For Beginner Traders?
It allows new traders to familiarize themselves with the brokers' trading platforms - for example, to learn how to place buy and sell orders, as well as how to set stop orders etc.
It's a common occurrence for new traders to enter into a buy trade when they want to sell, and vice versa. Without a paper trading account, they'll be paying for such simple errors with real money!
What Demo Trading Can't Help You With
Within the 'safety net' of a paper trading account, many conservative traders are unwilling to start 'live trading' accounts. These traders take comfort in knowing that they can't lose any real money.
This is a dangerous mindset to adopt because actual trading inherently involves taking real risks. When amateur traders grow too comfortable within the confines of a demo account, they stop their learning process: the important aspect of psychological discipline is ignored.
So don't wait until you're completely sure that you're making money before you trade 'live'. That day will never come. My advice is to trade live as soon as you've mastered the controls of your trading platform, but to trade with smaller amounts first.
One of the most important lessons to be learnt in Forex trading is how to manage the psychological impact of actual losses, and you can't get that by paper trading.
To learn more, Click Here to download my free 26-page guide, "Forex Trading Traps!"
Harold Hsu is the owner of ForexSystemProfits.com where he provides premium Forex trading tips and resources.
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