Many experts emphatically advise that you should trade in demo mode for some considerable time before risking your own money by going live. You can do this by opening a demo account with a selected broker who will then allow you to access its trading platform that contains extensive free demo facilities and tools. Once you achieved this objective, you will also be provided with a generous dummy balance that can be in the region of $50,000 plus.
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However, although this concept sounds great and definitely is a good step to take, you must understand that there are substantial differences between utilizing a demo account and trading a live one. For example, you will not experience the same emotional and psychological trauma whilst demo-trading because, as your own money is not at risk, you can adopt a more cavalier approach and attitude. In contrast, you will discover that live trading can generate serious nerve-racking situations especially if you start suffering real and substantial financial losses.
Nevertheless, you can utilize demo trading to perform a number of important tasks but you must do so in the correct way. For example, you can use it to evaluate the performance of your trading strategies, but in doing so you must strive to stimulate live conditions as closely as possible. You can achieve this objective by using all the features of your trading strategy in exactly the same way as you intend to do when you go live. In contrast, should you just trade your demo account in a lackadaisical way then you could well experience severe financial and emotional difficulties when you progress onto real trading.
This is because you will not enjoy any demo luxuries when you start to trade live. For example, you will now be totally responsible for protecting your own limited budget which you will not be able to squander so readily. Should you do so, then it is you who will have to make all the efforts to replace it, otherwise you will have to cease trading altogether. Consequently, you must realize that demo trading can foster a sense of over-confidence in your trading abilities that will be extremely dangerous to transfer onto live conditions.
Experts will also advise that you must learn how to control your emotions before going live but you will discover that this is difficult skill to master in demo mode. Your top priority when you are live trading is to provide the maximum protection for your own limited finances at all costs.
You will also only be exposed to weak psychological influences during demo trading because you will be under minimum financial stress. For example, you will not experience the levels of fear and greed that you will do when live. In essence, demo trading will invoke very few of these critical emotions unless you can stimulate live trading as accurately as possible.
Consequently, a gung-ho approach to demo trading can cause you to develop potentially poor trading habits such as trying to keep your positions open indefinitely. You will discover that such practices would not be a very good idea to transfer to live trading situations as you could expose your equity to high levels of risk.
You must combat these problems by trying to ensure that your demo trading conditions simulate those of live trading as closely as possible. For example, using a dummy balance of $50,000 when you are demo-trading could distort your trading performance if this amount does not match the amount you plan to use when going live. Instead, you should choose a sum that is more indicative of the size of equity that you will be able to provide yourself. By doing so, you will then be able to simulate live trading conditions much better.
You can also attempt to overcome these problems by selecting a broker who will allow you to open a micro account with just $25. You will then be able to live trade, but risking a minimum of 10 cents a pip. Consequently, this solution would enable you to endure the emotions and psychological influences of full live-trading but only by deploying minimum capital risk.