Forex Trading Education - the Role of Demo Trading

By: Harold Hsu

Most inexperienced traders are advised to begin trading using a demo account. While this may generally be a wise move, it's not always a good idea to demo trade all the time. In this article, I will discuss the role of demo trading, and its implications for everyday retail traders like you and me.

What Is Demo Trading?

Also known as 'paper trading', demo trading is essentially trading without using real money. Typically, this involves signing up for an account which tracks how much a trader would have profited or lost if he or she had traded with real money.

Is Demo Trading Always Advisable?

Generally, demo trading is a great place for new traders to familiarize themselves with the trading platform of their broker of choice. I've made many silly mistakes when I was demo trading and I'm glad I didn't have to pay for my mistakes with real money!

You definitely don't want to enter into a long position when your intention is to enter short. Sounds unlikely? Believe me, there are more traders that have made this mistake then they would like to admit.

However, excessive paper trading is not a good idea. There is a tendency for conservative traders to remain in demo trading for too long. Eventually you'll have to step out of your comfort zone and start trading with real money. There is only so much demo trading can do for the development of your trading psychology.

Why Not Stay In Demo Trading?

Essentially, paper trading has very little to do with real trading. Many inexperienced traders make the mistake of assuming that the two are very similar. In reality however, they are worlds apart.

Most people won't feel the pinch of a losing trade, and thus won't learn from the mistakes that come with it. A large part of trading is associated with learning from experience, and you can't have a realistic trading experience when demo trading.

So What Should I Do?

Of course, it is equally inadvisable that you immediately deposit $10,000 and start trading standard lots... there is simply too much at risk for inexperienced traders!

A better idea would be to start trading with a mini or micro trading account, where the profit and loss potential is greatly reduced. This way, you can feel the emotional impact of winning and losing in your trades and learn in a more effective, yet safe way.

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