Is it worth the effort?
I love cheese ... and chalk has its place in life too, but they are as different as, well ... chalk and cheese!
You could imagine Demo trading as one, and trading a live account as the other. Totally different beasts.
My own views on Demo Trading are made clear during our course but it does not hurt to pen it down in one easy-to-read article.
Most online brokers offer aspiring traders the opportunity to 'practice' their trading with a Demo account in the hope that they can tempt you into losing your money with them when you eventually decide to go for live trading.
A Demo account is where you trade with 'virtual' money, ie, play money. Your personal funds are NOT at risk and you can practice trading til the cows come home.
Many years ago traders would practice their skills by entering their trades by writing it all down on paper rather than actually entering the trade in a live situation, thus the term 'paper trading' was born.
Why use a Demo account at all?
This feature allows you to trade the markets with no actual money at risk thus granting the opportunity to get to know how the market moves, any 'money' used is in fact virtual money that the broker offers to you in their ads.
"Free $100,000 Demo Account"
Who can refuse that?
On the other hand, the trader may not have the live funds readily available at the present time but needs to get to know the details of how the platform works.
This, as far as I am able to work out, is the one and only benefit of a Demo account as it most certainly does not benefit the potential trader when he comes to use a 'live' account in any other way as we shall shortly see.
Maybe the trader needs the Demo account to test a strategy before he starts funding his live account? Maybe so.
I test my strategies every day but I do not have a Demo account. I make demo trades simply by placing the Left Price Label tool on any potential entry level when I receive a signal and let the strategy do the rest. I don't need a Demo account to do that.
When do I use this type of demo trading? Well, when I'm not 100% certain that the conditions are right to use real funds. As the chart rolls by I can see if these entries were good or not. I can then adjust my thinking and my strategy.
In the image to the right I have placed the Left Price Label tool to signify a potential entry level and to find out whether my strategy is up to scratch or not.
I don't need to play around with a whopping $100,000 demo account to see if my strategy is good or not. I can see it all for myself.
Traders should, and MUST, have a Trading Plan which details all of their trading rules. The problem is that these rules end up going out of the window during Demo trading allowing bad habits to creep in. The more you use a Demo account, the more that those bad habits are reinforced.
Using the Demo account
A successful demo trader may do very well playing with virtual money but may not succeed with trading a live account. Alternatively, failure with demo trading may not necessarily mean failure with a live account because it all depends upon the person as an individual.
I can categorically state that trading is a very emotional game when real money is involved. Not so with a Demo account where playing with virtual money will not prepare you at all for the battles ahead.
Lose $1,000 of virtual money and it is no problem. Lose just $10 of your own money and it is a different ball-game. If you could place the same trade at the same entry point - one with your Demo account at $100 per pip and the other with your live account at just $1 per pip. I know which one you would be watching like a hawk!
Would Demo trading really help you to get to know yourself as a trader? I seriously doubt it.
These may also have an effect
The broker himself:
The trader himself:
Yes, I did start with a Demo account as it was 'the thing' to do back then but I learned nothing about trading apart from how to use the trading platform. Maybe no bad thing then?
I honestly believe that playing the Demo Video Game is the worst move a trader can make whilst learning the 'ultimate game' with a view to making a success of it.
How can you play Russian Roulette without live ammunition?
If so there would be no emotion involved. It would be far far better to fund an account where the opportunity to trade microlots is available instead. Trade for pennies - at least there will be some emotion to keep you on your toes.
Spend time trading microlots and looking for a good broker instead of wasting time playing.
It is possible with such an account to find out what your broker is really like. More importantly to discover your own trading emotions and the measures you may need to take in overcoming them. Whilst learning to trade it is much better to lose a little and learn a lot whereby those very small losses can be put down to educational fees. As you make progress then you can raise the stakes.
Other benefits of a micro account
The main benefit is that you can discover if your broker offers everything that he promises such as execution, no requotes, customer support, withdrawals, market news, indicators, the small print (other fees), margin calls, etc etc.
Where your money is involved YOU need to be in control.
Your emotions will probably be in proportion to the amount you are risking during the live trading environment. Micro trading is a good time to analyse yourself while making and losing small amounts, not just concentrating on your trading strategy. These emotions are a VERY important part of your whole trading environment so please do not by-pass these 'emotional' lessons that will undoubtedly save you money in the long run.
Get to know your broker and the platform that he provides. If you are not happy then move elsewhere. Don't hang about. All those brokers are fighting for your custom and spending many thousands in advertising to get you to trade with them. They do not want to lose you to a competitor after they have taken the time and trouble to get you on board.
So do not fail to contact them if you are not happy with any part of your dealings with them.
YOU control YOUR money, NOT THEM.
See you when the market opens....
These are simply my views and you may or may not agree with them. Either way please let me know what you think on this subject in the comments below.