Paper Trading Forex Using Practice or Demo Accounts
Updated: May 16, 2013 at 10:38 AM
Perhaps one of the most useful features offered by online forex brokers for the novice forex trader consists of the demo or practice account.
Before the advent of this type of online account, new traders would often enter their trades on paper rather than executing them in the market. This activity gave rise to the term paper trading.
Benefits of Practice or Demo Accounts
Such practice or demo forex trading accounts now effectively allow you to paper trade in a virtual account using virtual money. Practice or demo accounts consist of simulated trading accounts where no actual money is placed at risk. Also, trades can be initiated and liquidated, but no real funds are actually exchanged.
Forex brokers typically offer demo accounts in the hope of attracting more business. From a trader's perspective, demo accounts allow traders to practice trading while not actually producing any tangible results in terms of actual profits or losses, which means you can test out your trading systems or strategies.
Overall, such practice accounts can offer trading novices a great way to learn about how to trade forex, as long as they do their best to avoid trading errors that might allow them to develop poor habits.
Learn How to Trade Forex Using Demo Accounts
Those new to forex trading can also use practice or demo accounts to help themselves get a better handle on how the forex market trades without putting any money on the line.
For trading novices, it can really pay to learn as much as possible about the forex market during a demo trading experience before graduating to live trading.
Also, depending on their psychological makeup as a trader, many people ultimately find that trading forex is just not right for them. Unfortunately, this often happens after they lose a large amount of money and blow out their funded trading accounts.
Basically, losing a large amount of virtual money in a demo account can be a lot less painful if the market eventually gives you the clear signal that trading the forex market is not exactly your cup of tea.
Demo Trading Success May Not Indicate Live Trading Success
The lack of actual money being placed at risk in demo accounts can result in significant differences between the performances achieved by forex traders in demo trading and live trading environments.
Such a variation can come from pricing or order execution differences on the part of the forex broker, as well as a platform switch or performance change.
In addition, they might arise as a result of a different set of emotional responses on the part of the trader when nothing is at stake versus when they have substantial amounts of money on the line.
Irrespective of the source of the potential performance difference, it will need to be taken into account when traders are either learning how to trade forex or are evaluating trading plans and strategies.
Demo Trading Helps You Know Yourself as a Trader
Once you have satisfied yourself that you are cut out for trading forex and that you have a decent trading plan by paper trading using a practice or demo trading account, you have probably gained considerable information about yourself, your trading needs and how you respond to pressures that might arise when trading.
Armed with this very helpful self knowledge gained from demo trading, you can then move on to selecting a funded trading account with a retail forex broker that will best meet your needs.
Moving on to a Live Trading Account
Basically, choosing the right type of live forex trading account to graduate to after demo trading the forex market involves having a good knowledge of your personal trading needs.
Next step: What type of account to open first?
Next >> Why open a micro forex broker account first >>
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Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.