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Online Demo Accounts: How Favorable Trading Conditions Make Forex Look Easier

admin on August 15th, 2008

When you take advantage of the possibility offered by many online brokers to practice trading in a demo account with “fake money” to get yourself acquainted with their platform, brokers usually state — either explicitly or not — that such conditions are very realistic. However, that is rarely the case.

Emotion in Live Forex Trading

We already talked about how emotion influences your live trading in one of our recent articles, so we won’t spend much time on this, if not to direct you once again to our free ebooks psychology section to learn more about it.

Even when you pass from trading five 100,000 lots of “fake” money to just a single 10,000 mini lot of your own money, the emotion will simply be overwhelming unless you learn how to control and manage it by setting (and not changing along the way) predefined stop and limit orders to confine possible losses and save your profits.

Large Sums in Demo Accounts Make Trading Look Much Easier

Having a large amount of money at your disposal has a huge effect on your trading possibilities, even in terms of strategy and money management, which gives you the impression you can just “buy and hold” and consistently be profitable that way.

Unless you really know what you’re doing, it’s not like that in the real world. Do you really have the nerves to buy and hold, even when your losses are being leveraged 50, 100, even 400 times? Unless you are taking a calculated risk, chances are you’ll incur in a margin call even before your trade has a chance to recover.

A high equity also greatly reduces the risk of margin calls. Don’t make the error of trying to simulate what you would do with your money by trading mini sizes, and then forgetting to set a stop loss. Buy and hold — although extremely risky — is practically bound to work on the long term that way, but this doesn’t mean that it will work with a much smaller equity.

In other words, if you have an equity of $100,000 and trade just one single lot of 100,000 with, say, 200:1 leverage, you can afford to lose many more PIPs that you could if you only had an equity of $2000 under the same conditions. If you try to buy and hold, you’ll incur in a margin call sooner or later: don’t forget that.

What to Do to Prepare Yourself for Live Forex Trading

A few final tips to prepare yourself for the “big jump” from demo to live trading:

• start by risking 1 to 2 % of your account equity in each trade by setting adequate stop losses, and don’t ever go beyond 5 % in any case;
• only start live trading when you have a definite and thoroughly tested strategy and money management rules, and follow them religiously;
• read our free ebooks on psychology and try to get the best out of them;
• log for each trade the reason why you entered, the reason why you exited, and the outcome.
• after losing a trade, ask yourself if you are feeling angry: if you are, refrain from trading at least until the next day.