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Practice Forex Trading - Transition To A Live Account
by Jay Meisler
Copyright (c) 2009 Jay Meisler
Most retail forex brokers offer free practice accounts,also called demo accounts. These accounts allow a newtrader the chance to practice trading in the forex marketat no charge. It also allows a trader to test out a brokerplatform and also test out trading strategies withouthaving to risk capital since it is all paper trading. Italso permits brokers to have prospective clients test theirplatforms and hopefully encourage then to open accounts.This article is aimed at the new trader and its goal is topoint out how trading a demo account differs from trading alive account.
There is a major difference between forex trading using apractice account where no real money is at risk vs. tradinga live account with real capital. It doesn't matter howmuch money is at risk. It is very different when tradingwith real money. This is when psychology and emotion getfactored into the mix.
There should be little emotion associated with trading aforex practice account. A position can go against you andit should not trigger any emotion as there is nothing atrisk. You can let a losing position run with no concern oflosing your capital as only your paper balance willdecrease. If the position eventually recovers and makesmoney, it does not prepare you for real-time forex trading.In fact, it may send the wrong signal that you can hold onto a position indefinitely until you recover a loss. Youmay get more excited if you make profits trading a demoaccount but it cannot compare with making real profits witha live account. Experienced traders will tell you to keepemotion out of trading but that is easier said than done,especially for new traders who have not experienced thehighs and lows of this business.
As noted, it is a different ball game when trading a liveaccount with real money. don't care if you risk one dollaror a thousand dollars. It is quite different when realmoney is at risk. It is difficult to describe what it islike trading with real capital as it is different when youremotions rise watching a position go into the red andseeing your account balance go down. This is especiallytrue for the retail forex trader who often comes into thegame either undercapitalized or trading with excessiveleverage.
This brings up another issue trading with a demo account.Currency trading practice accounts often come with a$50,000 balance and it is easy to leverage it up since itis only paper money at risk. It is also easy to place awide stop or no stop at all since you are not risking realcapital. It is therefore easier to make money this way ifyou use excessive leverage, do not use stops and get luckyif it is a time when markets are not trending. If youraccount gets wiped out, you can always open a new practiceaccount or ask the broker to replenish the existingaccount. This makes the transition to a live account evenmore difficult when the reality of trading with limitedcapital takes over. If your account gets wiped out, youeither have to replenish the capital or drop out of thegame. Losses are part of the learning process and alltraders experience them. It can become even more painful ifa trader enters the game with a false sense of confidence.
Now don't get me wrong. I am not disparaging practiceaccounts. In fact, I think they are a wonderful way tolearn how to trade. I wish they were available when Istarted out. Forex brokers provide a great service to theforex trading community by making them available. My issueis with new traders and how they generally use them. If acurrency trader trades a demo account without a systematicapproach, disciplined money management, proper use of stopsand leverage, looking for good risk/reward trades, etc.then the transition to real-time forex trading may be lesspainful. On the other hand, if a trader does not trade ademo account as he/she plans to trade in real-time, thenpractice trading can become a "fool's gold." Nothing willprepare you for the emotion associated with trading realmoney but if you take advantage of a practice account tohone your skills as if you were trading real-time, it willat least prepare you for currency trading in real-timeconditions.
About the Author
Jay Meisler has been a forex trader since the 1970s and hastraded for a bank, managed a fund and been an independenttrader. He is a co-founder of Gllobal-View.com, the leadingforex discussion site that attracts members from over 170countries. Traders from around the globe come toGlobal-View in search of trading ideas, latest news, flowsand rumors => global-view.com
RCA Color TV ad from early '60s
"I saw Color TV--WOW!" This IS old!
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