Trading Strategy

Why New Forex Traders Should Practice with Demo Trading

January 10, 2021 | 11:50 am | The 5%ers' Blog > Trading Strategy
January 10, 2021 | 11:50 am
The 5%ers' Blog > Trading Strategy
Why New Forex Traders Should Practice with Demo Trading

Forex Trading Demo

When exploring the idea of trading in a new market, it’s natural to want to get started. You’re excited about the opportunity before you, and there may even be a specific reason you’re eyeing a new market.

Where forex is concerned, for example, you may be looking ahead to 2021 and anticipating favorable trading conditions. As the world recovers from the 2020 pandemic and ensuing recessions, different economies will rebound at different rates. This could cause more movement and discrepancy between major currency values than we’re used to — which could make for a lot of opportunity in forex.

In a situation like this it will always be tempting to try to take advantage of that opportunity. Put another way, you’ll want to trade as soon as possible so that you can begin to capitalize on the market. Where forex trading is concerned though, there’s something to be said for holding off, at least for as long as it takes to get a bit of practice.

This is doable thanks to the widespread availability of forex demo platforms, which imitate real-world conditions and price movements within a simulated trading environment. And there are a few specific reasons that demo trading makes for excellent preparation, beyond the general idea of practice.


Getting Used to Volatility

Despite not being a new concept by any stretch of the imagination, volatility has become almost trendy in modern markets. In fact, it’s to the point that The Wall Street Journal posted an article this year about traders who are now effectively wagering on volatility itself — profiting off of the degree to which stocks and other assets are volatile, rather than off of the actual values of those stocks and assets. But in forex specifically, volatility is more of a condition to be taken advantage of in the midst of currency trading.

We mentioned above that more movement and discrepancy between currency values can make for the opportunity. This is very much the case, and it’s something experienced forex traders look out for. But volatility can also be somewhat overwhelming, particularly to a newcomer. Practicing your FX trading in a demo program can help with this. It will expose you to periods of high volatility so that you can get used to the movements and uncertainties, and ideally learn how to capitalize on them.


Understanding Leverage

If you’re exploring forex trading, you’ve likely read that leverage is often part of the process. FXCM outlines that leverage is generating a significant return on investment despite the fact that currency prices are quoted to the hundredths of cents. With leveraged trading, you can invest a relatively small amount of capital, and trade with many times that amount. So, for example, a $10 investment at 200:1 leverage would allow you to trade as if you had invested $2,000.

Leverage is very ordinary in forex trading, as you may well know. But it’s tempting for newcomers in the market to focus on the purpose for leverage, and the potential benefits, to the exclusion of risk. Just as trading on leverage can help to maximize gains, it can also make losses more damaging. And that ultimately makes for another good reason to spend some time in a demo. You can gain a better understanding of the risk-and-reward nature of leverage in practice.

 

Determining Your Style

In a somewhat more general sense, you can also help to figure out your Trading Style by spending a little bit of time with a demo account. This doesn’t just refer to personal tendencies either, so much as actual strategies and types of trades to focus your activity on. Between trend trading, technical trading, swing trading, position trading, and more, there are a lot of different ways to try to capitalize on forex movement. A demo allows you to try them all if you so wish, and discover which one makes the most sense (or yields the most simulated profit) for you.

More vaguely, but not at all insignificantly, you may also gain a better understanding of your own trading “personality” and how high your risk tolerance is. This takes a little bit more introspection and self-assessment, but understanding your own natural psychological approach is essential for successful trading.

Taking Your Losses

As CNBC put it bluntly when advising modern traders, most day traders lose money. This is a simple fact and one that’s particularly true among beginners — both in stock markets and in alternative environments like the FX trade. What this means is that you should expect to take some losses, especially in the early going. But if you do so in a demo, naturally, you aren’t out any actual money!

That doesn’t mean you’re guaranteed success in the actual forex trade, of course. But getting a few clumsy decisions or poor trades out of the way in demos can get some of the unnecessary losses out of the way, and help you learn in the process.

Demo trading is ultimately a good idea for newcomers to any trading environment, wherever it’s available. Given the unique nature of the forex market though, and the importance of factors like volatility, leverage, and varied styles, it can be particularly useful for those entering the FX trade.

 

Demo Trading Summary

The forex trading market is one of the busiest and most well-known investing environments in the world. For newcomers though, it still presents some unique circumstances to get used to. Practicing with a demo trading platform can help these newcomers to grow accustomed to the particulars of forex – without risking actual money in the process. In this piece, we’ll look more closely at what is to be gained by taking this approach.

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