Updated March 2020
Imagine you’re a newly appointed trainee chef.
Eager, excited and daydreaming of becoming a world-renowned culinary chef, the head chef unexpectedly throws a curve ball. He asks you to begin preparations to cook at one of their finest restaurants that evening. This would surprise and shock most trainees.
A trainee chef needs time to hone their skills before let loose in a restaurant’s kitchen. Without the knowledge of how to correctly slice an onion or even read a recipe would, as you can imagine, end in culinary disaster.
Like the trainee chef, a trader must take time to develop and mature. Fortunately, simulated practice accounts are available, offering opportunity to experience the market’s gyrations risk free.
Perhaps the greatest appeal of a demo account is its free from risk.
Traders, particularly those new to the industry, often rush into live trading yearning for riches. Unfortunately, many pay the price. Unlike doctors or lawyers, who undergo rigorous training before considered competent, a trader, with a few clicks of a mouse button, can trade using real money. The barriers to entry are perilously low.
A demo account provides entry to the live market at no cost; the trader is free to familiarise themselves with the platform’s features in a risk-free environment. Determining lot sizes, knowing the procedure behind executing an order and how to alter protective stop-loss and take-profit orders are things best learnt in a simulated trading environment, as mistakes will happen.
An additional point to consider is the testing capability a demo account offers, WITHOUT fear of losing real money if the method proves a flop.
Time and again, traders launch live trading accounts without fully testing the strength behind a trading strategy. Unaware of historical statistics, it’ll be difficult not to panic if/when a string of losses occur.
Another feature, often disregarded, is how accessible your chosen Forex broker’s support team is. The last thing you want is an uncooperative support team when you need them most. Testing the response with a demo account before considering a live platform is important.
A Trading Journal
Trading the financial markets will forever be a learning process. It is essential traders maintain a diary of events. Even experienced traders stress the importance of keeping a trading journal.
Memorising the subtle nuances of each trade is crucial. It is how you identify errors and ultimately mature as a trader. By maintaining a journal, it’ll enable you to identify strengths and weaknesses made in demo trading before transitioning to a live trading account. In order to keep a trading journal accurate, trade with a demo account balance comparable to what you intend to begin with in live trading. It makes little sense to trade a $100,000 account if you’re planning to trade with $1,000. The goal is to keep it as real as possible.
Fortunately, IC markets allows you to select the opening balance in simulated accounts. What’s more, there’s no expiry date, making it easier to track your progress.
The Psychological Impact
The primary distinction between demo and live trading is the latter inflicts a barrage of emotions. Humans seldom like being wrong, and for the majority of sane individuals, also dislike losing money. A loss, or string of losses, causes distress for many new traders. This is not experienced in a simulated environment.
Two primary ways of overcoming the lack of psychological challenge in demo trading exist.
- Think of successful demo trading as a license to trade live funds, similar to learning how to drive. Before you’re granted permission to drive on public roads, the learner driver must undertake hours of training to ensure safety. In order to receive this license, in terms of trading, you must maintain consistency using demo dollars. By design, this places you in a setting in which you’re forced to respect risk and money management principles. This provides the trader an objective – a target to achieve before progressing to the next stage: live trading.
- The second method involves setting real-life consequences if you fail to follow the trading plan’s rules of engagement. A common mistake among newer, and some older, traders is neglecting risk management. Moving the protective stop-loss order during a trade, for example, can have disastrous consequences. Paying a dollar into a jar next to your trading station following trading mistakes helps instill a sense of loss. You could even donate this money to a charity; this will help remind you a trade has consequences.
Aside from diminishing psychological effects, a demo platform is not subject to slippage. This is something that can occur in a live trading environment, so do take this into account.
Opening a Demo Account
Opening a demo account with IC markets couldn’t be easier. What’s more, we have MetaTrader 4 (MT4) and MetaTrader 5 (MT5) and cTrader platforms available to choose from, as well as a wide range of currency pairs, metals and CFDs – all trading with attractive spreads. To get started click here.
Once you’re familiar with the platform’s functions and have a tested method in hand, you will likely be looking to open a live account. With IC markets, you can open an account with as little as $200. That way, assuming you risk no more than 2% on each trade, making your very first live trade need not break the bank should you make a mistake.