The most common questions novice traders ask are how long a demo account should be used and how to learn to trade with a demo account. And my opinion on demo accounts may be the opposite of what most websites talk about, but I firmly believe that if you want to succeed in the forex industry, then you can't just listen to everyday advice. 99% of traders are looking at these things, and their trading methods come from this way, and in the end, most of them lose money. It's time to change perspective, at least that's what I've been doing, and it works.
It goes without saying that the demo account is always the first!
There is no doubt that every trader should start with a demo account, and it should last at least 2-3 months. I see a lot of traders have a serious problem that they cannot transition smoothly from demo trading to real trading, they get stuck in demo trading. And using a demo account for too long can easily destroy your trades.
The purpose of simulated trading
You have to ask yourself what is the purpose of simulated trading and what experience do you want to gain, so that you can objectively judge whether you have achieved these goals and whether you are suitable for transitioning to real trading. The purpose of simulated trading has three aspects:
1. Understand the trading platform
For novice traders, it is very important to have a solid understanding of the trading platform. You have to try every button, verify every function of the platform, and know how to use the platform, which will allow you to transition to real trading more smoothly.
2. Master the order type
Make sure you understand the different order types and how to execute a trade. A demo account offers the best chances as it has no consequences.
What is the market you are trading in, what is the difference between a stop loss order and a limit order, how to set a stop loss and take profit... all the different order types need to be clear and watch how they are executed. You will quickly master a lot of things, and this step is easily overlooked by many people.
3. Perceive market dynamics
During the 3-month demo trading period, carefully observe the market dynamics, how the price fluctuates, and record everything you notice. This is the key to avoiding large losses or making unnecessary mistakes.
I list the important observations below:
● When does the price fluctuate the most and when does it not fluctuate?
● How do different markets, forex pairs and time frames affect price volatility?
● Which time of day do you trade the best?
● How does news affect price volatility? What kind of news can cause big market fluctuations?
● What type of price action are you best at dealing with?
● Do you find that there are many price gaps? How to deal with this situation?
● Are you comfortable with overnight positions?
What can't be done in simulated trading?
It is also important to understand the limitations of paper trading, these are the experiences you should not expect to gain from paper trading. Check out these limited features below, don't expect them like most traders:
1. Test your system
This is the biggest flaw of paper trading, but many people still do it. You should not test the profitability of a trading method or strategy on a demo account. Just because paper trading works well doesn't mean you can have the same results in real trading.
Simulating trading is like a bicycle with a wheel guard. You can ride it well and never get hurt while you are learning, but remove the wheel guard and you will find that you have not learned how to ride a bicycle.
As mentioned above, the demo account can only be used to understand your platform, how to execute orders, and understand how the price fluctuates. It cannot be used to determine whether the trading method works.
2. Prepare for real trading
Simulated trading and real trading are completely different things. Generally speaking, they have nothing to do with each other. If you have real trading experience, you know that the biggest challenge in trading is not price fluctuations or how to identify good opportunities, but how to deal with the emotional response to capital investment. Here are some experiences that demo accounts can't give you:
● Wait a few days for principled deals
● Uncertainty and psychological pressure after entering a transaction
● Emotions that keep you lingering in losses, or exiting winning trades too early
● Get in too early because you want to make more money
● Don’t want to lose money, afraid of missing good trading opportunities
● Don’t want to get out when it’s time to get out, greed makes you not want to miss out on more profits
Many traders have probably told you to take paper trading as seriously as if you invested your money. But this is impossible. You can never lie to yourself, you know this is just simulate trading.
The biggest hazard of simulated trading
The biggest problem caused by traders who use demo accounts for too long is that they are very easy to develop unprincipled trading habits, which are difficult to eradicate in the future. A trader with bad habits who go unpunished will never feel the pain of losing money, their laziness and unprofessional attitude will be contagious in real trading, and loss is the only ending.
You may not realize that using paper trading for too long can do more harm than good.
How to transition from demo trading to real trading
Here are a few tips:
1. Start small
It is very difficult for a trader not to lose money at the beginning. Therefore, start with a small amount of capital investment and control the loss within an acceptable range.
At the same time, make sure that the money you lose is worth it. This requires you to know what caused the losses and how to avoid them in the future. If you haven't learned any lessons, you will never get out of the loss circle.
2. Manage your emotions
After a losing streak, it is easy for a trader to lose motivation or interest and become increasingly negative and confused. In order to avoid these, you must first understand what motivates you to trade, don't have unrealistic expectations, and don't be too harsh on yourself. The most important thing is to enjoy the process.
3. Don’t focus too much on money
It is difficult to avoid losses in the early days of a trader. Your first task should be to accumulate experience, establish principles, form your own trading habits, and maintain your enthusiasm for trading. Coupled with a solid approach to money management, you are sure to have a solid foundation for a long-term trading career, which is an important prerequisite for success.
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