It is highly recommended that once you have finished forex training you should open a demo account. While these demo accounts are excellent preparation for the FX live market, they may have disastrous effects on your trading abilities. It seems they are associated with many psychological pitfalls for unsuspecting traders. Only when used correctly can you avoid these traps and transition to the live market successfully.
Trading according to your FX training
When using a demo account it is vital that you trade in accordance with your FX training. If you do not then you will not be getting the full benefit of your account. It has been seen that traders who diverge from their training have a greater chance of experiencing losses when transitioning to the live market.
Difficulties with the trading account capital
When using a demo account you will be trading on the live market but with virtual capital. As you are not trading with your own money you may feel more reckless due to the absence of consequence. While this allows one to learn from losses, it can also influence the transition to a live market. When traders move from a demo account they will continue to trade in this care-free manner despite the fact they are risking their own capital. This will often result in detrimental losses and in some cases account depletion.
Executing a trade
A demo account can provide an understanding of the FX market but it can also set unrealistic expectations. The demo account executes trades immediately; however this is not something that happens on the live foreign exchange market. A trader will trade via a forex broker on the live market which results in a delay of trade execution. Dependent on the reliability of the broker and condition of the market, this delay can last from a few minutes to hours. The unrealistic expectation can lead to great levels of anxiety within the trader. This heightened anxiety can cause emotional trading and detrimental losses. The trader may also mistrust their broker which increases trading stress.
Testing the forex trading strategy
One of the functions of a demo account is to test your forex trading strategy. While trades are executed immediately, they can provide a distorted perception of the profits made. This is especially true when using short-term strategies that require precise entry points. Yet, if you are aware of this a demo account can be effective for strategy testing.
FX trading and you
The FX market is a highly stressful one and only certain personalities are able to manage the environment. By using a demo account you are able to determine whether you have the correct characteristics to handle forex trading. It is important you identify your risk tolerance levels before entering the forex live market as this can affect your psychological well-being. You must be honest with yourself when establishing your tolerance as FX trading is a very dangerous occupation to pursue.