If you are just getting started investing it's recommended to experiment with different strategies before jumping into the real thing. Test drive in a practice trading account before you spend your capital in the real world of online trading.
Would you send your teenage son or daughter out onto the busy highway before letting them practice their driving and pass a driving test? Hopefully, your answer is a resounding no.
They need to practice the skillset of driving just like you did when you were in your teens.
Trading the financial markets is no different. You must master dozens of new skills to be competent and move from conscious competence to unconscious competence.
In this article, we will cover what a demo account is, how important it is to use one, the top 3 reasons you should use a demo account, and more. Keep reading to learn skills you can practice in a virtual trading environment, getting you closer to trading mastery.
A demo account is a type of account offered by brokers to simulate the real market environment on their trading platform. The biggest difference is that instead of trading with real money, virtual funds are used. You can therefore not lose any real money when using a demo account. While the purpose of it is to mimic live trading conditions as closely as possible, there can be minor differences (for example, when it comes to execution or order rejection).
Demo accounts are available to everyone! Your demo account will expire after 30 calendar days, but you may request a non-expiring version of the demo after you sign up for a live trading account. Demo accounts are not only used by beginners but also by experienced traders who want to conduct testing without risking real money.
All markets available through our trading platforms on a live account are also available on the demo version, except for single-stock CFDs.
You can download the MetaTrader 4 app from both the App Store (iOS) and Google Play Store (Android).
After signing up for a demo account you will receive a welcome email with your login details and a link to install MT4 on your PC. The installation will take less than 5 minutes, and you will be able to log in to your account by using the credentials provided in the email.
The most obvious reason to use a demo account is to test every trading strategy you have before going live. There are plenty of effective forex trading strategies but to find the best one for you, you must test them.
It makes sense, right?
Instead of risking real capital, you can learn the ropes and intricacies of your trading system without any pressure of financial loss.
You may have already back-tested it using historical data and used a big enough sample size to indicate your strategy has an edge.
Now you need to move to forward testing.
This means you are going to test it on live data but in a demo environment.
Some of the key points you are looking for are:
The more you practice your trading strategy in the comfort of a pressure-free demo environment, the higher the chance of executing your strategy in live testing with real money.
So, take your time in getting this testing done correctly.
Your confidence in each trading system will improve dramatically following these demo tests.
Let’s say your end-of-day forex trading system generated 30 signals per year on average.
As you can appreciate, it would take a long time to gather experience trading this if you were to use a demo account and take every signal that came up.
Instead, a powerful alternative is to use a demo account but apply your system across a 5-minute chart.
By moving to a lower timeframe and using the same entry and exit strategies, you can increase your trading experience 10-fold.
Using a 5-minute chart, you might get 30 trading signals per month instead of 30 per year.
This will fast-track your experience and give you valuable insights which would have normally taken several years. Repetition is the mother of skill, and by using a demo account across a smaller time frame, you can gain years of experience in a matter of months.
The beauty of trading forex is the excellent liquidity in lower time frames.
Stock traders do not have this luxury as there is often a cost (platform and data fee) to access live intraday 1-minute and 5-minute charts.
Those using MetaTrader 4 with Axi have no monthly fees when testing strategies across any timeframe.
Malcolm Gladwell wrote an iconic book for those interested in becoming peak performers called Outliers.
In this book, Gladwell fashioned up something he calls the 10,000-hour rule.
His hypothesis, backed up by some powerful real-life stories, suggests that 10,000 hours of deliberate practice will help you become world-class in any field.
Gladwell cites Bill Gates, The Beatles, and many young athletes who rose to the top of their fields after being exposed to opportunities in their field and applying deliberate practice to their craft.
Trading is no different.
You must practice the skill of trading, and this is where a demo account is so handy.
You want to be able to enter a position with a pre-determined exit level. Monitor your position for a breach of your exit conditions and close your trade.
This skill set is critical for anyone trading with leverage. You must be able to exit when the time comes.
Failure to do this using leverage could lead to losses in excess of your starting balance. Remember, trading leveraged products is risky.
This technique allows you to ride winners and maximise your trades.
But the strategy is much easier said than done, as the trades could turn to losers and maximise losses instead. This is why practice is so important.
Applying this technique in a demo environment repeatedly allows you to ingrain this technique and apply it in real-time with ease.
Another interesting technique that can be excellent for reversal pattern traders who ride a long position from oversold to resistance and take advantage of a possible reversal trade the other way.
There are many other reasons why you would want to stop and reverse. News events are common too, especially during the likes of Non-farm payroll data releases.
You want to be able to practice this technique and feel confident on a demo account before jumping in head-first during a major news release.
The main difference is that on a demo account, you are trading with virtual money and therefore cannot lose any real money. This is useful for testing different strategies or trading styles, but you should also keep in mind that trading with fake money will mean that you are unlikely to experience the pressure and psychological pitfalls that can come with live trading since there are no risks involved.
Furthermore, the execution speed might differ at times, and you may not experience re-quotes in a demo environment, while this could possibly occur on a live account.
Ready to trade your edge?
This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation, or needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability regarding the accuracy and completeness of the content in this publication. Readers should seek their own advice.
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