Pretty much every broker that offers an online trading platform offers a free demo for that platform that allows you to trade, completely risk free in an environment using pretend money on the real markets. All the brokers we partner with offer this too, and, if you’ve never traded before, it’s a great way to familiarise yourself with the platform, ….with one small catch. There’s an open secret which no one denies. A missing element that you need to deal with before you can call yourself a seasoned trader. Its only once you’ve come up against it, that you can really know whether you can be a trader. I will tell you what it is in this article, as best as I can, but I know I’m going to come up short.
Most demo accounts offer a $50,000 account to trade, along with the professional software (usually Metatrader 4 or Metatrader 5 (aka MT4 and MT5) that is used to trade the markets. In these accounts, you have access to all the currency pairs, commodities and other trading instruments the broker offers. As well as this, some brokers offer custom tools, that plug in to the MT4 platform that can make trading that little bit easier.
Have a try yourself.
Here, you can sign up for a demo account and start trading with an account of $50,000.
Sounds great right? Well for the most part, it is great. You can quickly learn a lot about trading, how to place a trade, see all the instruments available to trade, basically become familiar with the account and environment.
When you sign up, you can download the MT4 (or MT5) software platform, and it will look something like this. And you will see quite clearly which currency pair or commodity you are trading and how you can quickly place your trade. Go ahead and give it a try. Pick out a trading pair, say EURUSD since its probably the most widely traded, and make your trade. Very shortly the price has moved your way, and you beat the spread and taken a nice little profit. That was easy wasn’t it. So you go again…and take some profit again. And again, with a larger position this time and you’re lucky third time too. You’ve done well and you’re only on your first day. You know you probably got lucky. But these demo accounts last for 30 days usually, so let’s see how the rest of the month goes.
Now you could make a healthy profit by the end of the month. If you know how you made it then great. Carry on with a live account and welcome to your new profitable life.
But odds are its going to go something like this.
You start to think, you’re doing well and you want to maximise your profits. You want to make sure you don’t waste any of your time that could be spent making money. You increase your trade position size and you dedicate more of your time to your trading screen. You know you need to be a bit safer so you add a stop loss.
You’ve traded for a few days and you just had your first loss. With that larger position size, it took a hefty chunk out of your funds. That’s ok, though. You can’t expect every trade to be profitable and even experts have losing trades or even losing streaks.
All of a sudden, 30 days are up and your account is all but wiped out. But that’s ok right? It was only a demo. That was what it was for. You know you played it way too risky. You won’t do that on your real account. You learnt a valuable lesson about how quickly you can lose your money.
Even though your practice went poorly, you’re not going to give up. It was just a setback. Lessons have been learnt and you’re going to carry on with a live account.
So, what is the problem with a demo account? You got a taste of trading without any risk, and you didn’t lose any money. The demo did what it needed to do. After all this what is the missing element I mentioned? Let’s have a look at the live account and watch another scenario unfurl.
Well now that you have opened a live account with your real funds, and as promised its exactly like the demo. That’s fantastic. You go ahead and open your first trade and stare at the screen watching the ticker move up and down. Every pip adding or taking away from your profit. Then you see the ticker dropping lower, your loss is increasing. Every pip taking actual dollars out of your account. Even though its nowhere near the stop loss you set, that negative profit isn’t exactly an enjoyable sight. A few more pips fall and more money disappears with it. Its still within your stop loss but you don’t want to wait until even more money is drained from your funds. You accept the loss close your position.
You are once again staring at the screen. You think to yourself that your strategy was correct. You had checked the trends beforehand, the news and overall fundamentals as well, and it was all solid. While you are wondering what happened, you notice the ticker start to climb. It keeps going higher but you’re not going to jump in on impulse. Interestingly The ticker ends up exactly where it you predicted it was supposed to. If you had held on, you would have been sitting on a nice, and more importantly, a predicted profit.
So what went wrong? You didn’t account for the missing element in the demo. Emotion. In this case it was fear. You were losing money by the second. Even though you had planned for the contingency, you doubted yourself and let fear overcome your reasoning and close out your trade early.
While you were practicing on the demo, there was no fear at all. You started increasing your position sizes because you weren’t afraid to lose that money. You didn’t learn about risk management or lot sizing. When you lost it didn’t matter since it wasn’t real money and when you won, you told yourself you were awesome. You didn’t pay attention to the trading calendar to check news. None of it mattered.
If you carry on like this you would end up like most other new traders. Broke. Without understanding drawdowns and a proper risk management strategy, it is unlikely that your account would last long.
I promised you right at the start, that in my explanation, Im going to come up short. And thats because, as much as i can tell you about all the emotions, you may experience, nothing can compare to doing it for real. Just being told that you'll be afraid when its your money on the line will not adequately express what you will experience. You wont know how you will behave until you go through it. The urge to increase your position size when you are doing well or to cut losses when you are losing.
So, what’s the solution? The best answer is education. There are plenty of resources around the internet, free resources at that, that will teach you not just the basics but theory and strategies as well as risk management.
Once you have committed to learning, the second part of the answer is an actual live account. Forego the demo, and take a step with a small live account. Much smaller than your intended investment. Small enough that even if you wiped it out completely, it wouldn’t affect you. You may be asking, that if I’ve just made a case that as a new trader, I’ll lose my money why would I gamble with real money? Well that’s exactly my point. You shouldn’t be gambling; you should be trading based on educated analysis. You didn’t worry about losing money when it was time to open a demo account. That is because, at that time there was no fear about losing money. If you open a live account, you will be afraid. That’s the point. And hopefully that fear will stop you just randomly opening trades on a whim. Because that’s what gamblers do. You are going to be putting into action, the things you have learnt. Most importantly, you are going to experience all the emotions that go along with trading for real and not let them control your actions. As a result when the emotions start making their presence felt, you will fall back on sound education rather than irrational impulse
If you are ready to start learning www.babypips.com is an excellent resource for beginners, highly recommended by the trading community. You can open a live account here and at the same time you can still open a demo account here.