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Is a demo forex account the right tool to help you practice trading?


01 forex demo trading

Practice makes a man perfect! Someone wise once said. No doubt, the more you practice, the better you become at whatever it is you are doing. But take this with a pinch of salt.

What if you kept practicing something, but have the wrong tools at your disposal? Regardless of how long you practice, when you use the wrong tools, chances are that you will not get ahead.

Retail forex trading, as one might have already heard, often attracts just about anyone. The lure to speculate in a wide range of instruments and the fact that it allows traders to access the markets with little upfront, makes retail trading quite an attractive proposition.

But as statistics go, more than 90% of retail traders end up losing money. The reason behind this are many. Ranging from greed to the notion that practicing trading just a few times is more than enough.

Then, you also come across various trading forums where people share their strategies and ideas. One might fall into the false sense of illusion that retail trading is easy.

And why not? Whether it is a retail speculator or even an investor, there are many examples around. The most recent and perhaps most famous of all is the story of how a retail investing forum managed to take on the might of institutional money. Yes, we are talking about Gamestop frenzy and the Reddit forum, Wallstreetbets.

02 Gamestop

But in this discourse, we talk specifically about the retail trading or retail speculators. Many such traders often tend to look up to an online broker that offer deposits of as little as $100 and high leverage to “help you” get started with trading and speculation.

The paper trading myth

Quite often, almost all these brokers give you the chance to capitalize on a demo trading account. A demo trading account also known as paper trading allows you to speculate in the markets, but with virtual or fake money.

The main purpose of paper trading is to simulate the real market conditions without risking real money. Think of paper trading as learning to drive in a simulated environment.

03 simulation
It might seem like you are in control, but then, things chance once you are on with real money. So the question arises, as to whether practicing how to speculate using a demo or a paper trading account really helps.

There are clearly some shortcomings when it comes to learning how to speculate using a demo trading or a paper trading account, which many tend to miss.

Having the right tools matter!

During times when you are learning how to trade, it is important that you have the right tools at your disposal. And no, we are not talking about simply opening a demo or a paper trading account.

At the very least, when you are learning how to speculate, there are a few things that you need to understand, or need to know how things work. Let’s outline a few of them.

1. Learning what moves the markets

Even before you login and click that buy/sell button, it is important to first understand why the markets behave the way they do.

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You don't have to sign up for an online course in economics or finance. Still, you need to know a bit about the instruments that you are trading. Most often, traders then to look at all the instruments (regardless of the fact that they are different asset classes) equally. But this is not true.

Therefore, spending a considerable amount of time to know the instruments that you will be speculating your hard earned money on, can help you better navigate the markets especially when there is real money involved.

2. Understanding your strategy or trading system

Let’s face it, as a speculator, you will most likely trade intra day or at best hold your positions over a span of a week or perhaps a month. The key to speculative intra day trading is that you will need to have a strategy or a trading plan. Secondly, you need to thoroughly understand how your trading system works.

This is where many tend to make use of the demo trading or a paper trading account.

While demo trading or paper trading helps, it does only to a certain extent.

To really understand how your trading system works, you need to be able to control the data flow. What if you want to replay how your last winning trade came about?

What if, you want to thoroughly examine the way your trading indicators lined up to give you that perfect trade?

A demo trading or a paper trading account certainly won’t help, unless you constantly keep taking screenshots, make notes, create a journal and so on. The amount of additional tasks you need to do, just to analyze your demo trade using a paper trading or a demo trading account can be very tedious.

3. The same trading strategy can yield different results for different traders

You might have come across various trading forums that allow its users to share their trading strategies and results. Such forums make it easy for the trader to simply make use of that same trading system on their trading accounts.

But the truth is, even if the trading system managed to make profits for the user that posted the system, you might still end up losing money using the same trading system.

Why is that?

The reason is simple. Firstly, you cannot expect to get far ahead in retail trading if all you are concerned about is buying or selling when a given set of conditions are met.

Sure, you may argue that big institutions invest billions into AI and algorithmic trading. Yes, that’s the key. Big institutions invest billions and years into research.

So, if you think that you can get away easily by just mechanically buying and selling, it will be a recipe for disaster.

What makes for a good trading tool to practice how to trade forex?

As mentioned earlier, having the right trading tools at your disposal is important. And we already pointed out why a demo or a paper trading account doesn’t quite make the cut.

Here are some quick points that argue in favor of having the right trading simulation tool for you.

  1. You practice in the safety of using virtual or dummy funds, without risking actual money
  2. You are able to trade in an environment that actually simulates the real market conditions
  3. You should be able to use your own trading system with ease, when using a trading simulation software
  4. You should have control to pause, replay, go forward in order to analyze in detail how your trades worked out.
  5. You should be able to make notes right into the trading simulation software, as well as the ability to take quick notes and refer to them with ease.

Having pointed out the above, now can you really say that a demo forex trading account really helps?

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If you didn’t think of the above, that’s all right. Most of us don’t really think on the above points until we hit our first losing trade. That is when we start to take things seriously and ask questions we didn’t think of earlier.

There are many trading tools that allow you to simulate trading and to also back test your strategies. But among the hordes, this trading simulator and back testing software makes the cut above the rest.

Known as Forex Tester, this piece of software puts you fully in control and addresses the above five points mentioned and even more.

Practice makes a man perfect. True! Having the right tools while you practice is what makes you perfect.

Read 81 times Last modified on Thursday, 20 May 2021 08:39