As a Forex trader, one of the first things to do is to open up a demo account. And this is particularly true in the Forex world.
People can run a demo account without risking any money and use it to test a broker, new trade strategies, and become familiar and comfortable with the markets.
But it is essential to know that the concept of demo trading or 'paper trading' varies a little bit from a live account.
If traders are profitable in paper trading, it does not mean that they will always be profitable on a live account. It might happen, but it is not guaranteed.
The Benefits
Starting with paper trading before a live capital has some major advantages. If traders are only beginning to learn about trading, it has higher chances of losing losses.
People can't expect to walk into a job and quickly become a star. But for some reason, many traders actually think it will be like that. They must be more realistic and have a healthier understanding of how Forex Trading works.
All strategies should be tested in a low-risk environment, and paper trading seems to be the best option.
A demo account lets traders see how the market would have treated the system. And this can give valuable insights regarding the strategy.
In addition to that, it does something else that most people don't know about: it builds up confidence.
If the system consistently makes money over the long-term, traders will feel more confident after taking a couple of losses.
They will know that eventually, they will make money. Also, if traders have a solid trading history, they'll be more comfortable staying with the trading system instead of abandoning it at the first sign of loss on a real account.
One more major benefit of paper trading is when there is a new strategy. People can use the demo account to see the results in real market conditions.
After they have proven the new trading strategy, they can risk real trading capital with it.
Paper trading has a lot of lessons to teach. One of them is patience. The market does not always offer pleasant opportunities. Thus, traders need to wait for those traits.
As traders wait to trade live capital, they are testing their patience as far as forex trading is concerned. Having a lot of patience will serve them well when they start to trade on a live account.
The Drawbacks
Demo trading is not just a soft bed of roses. One of the most negative aspects of paper trading is traders put a lot of work in. And they don't get to hit the payday.
One more problem with demo trading is how easy it is to place trades randomly. If traders do that, they might end up surprised as they get into the live markets.
And the biggest surprise people who don't take demo trading seriously is when a lot of emotion became involved in those trades that don't quite go the way they thought they would.
And that is the biggest challenge: demo accounts don't simulate the range of emotions traders feel when winning and losing money.
