OspreyFX Demo Account: Test Your Strategy
*OspreyFX states that traders should research extensively before following any information given hereby. Any assumptions made in this article are not for traders to guide or alter their positions. Please read our Terms & Conditions and Risk Disclosure for more information.
Key Takeaways:
- Learn the purpose and benefits of a demo account
- Avoid pitfalls and experiment with trading strategies
- Know when to transition to a live account
What is a Demo Account
In any financial market, brokers often offer two types of trading accounts: live and demo. Live accounts are used for real-life trading using your investment capital. Whereas online trading demo accounts are practice tools that mimic market conditions. They help traders test the efficiency of their strategies and familiarize themselves with the platform. Signing up for a demo account is usually free and provides traders the ability to experience live trading without risking their money. Accordingly, there are no commission fees, pay-outs, or losses.
Therefore beginners are those most interested in demo accounts for educational purposes. It gives them a chance to learn about the process without the anxiety of accumulating potential losses on the journey. Indeed, you can find out a lot about trading and the trading platform by using a virtual trading tool. They are similar to live accounts in terms of displaying price trends and swings, offering trading instruments and indicators. It is meant to be an overall realistic experience. Thus, trying out strategies and putting to the test tactics will eventually lead the novice trader to find their trading style. Do you favor short-term transactions or prefer to leverage longer-term positions?
Easing into real trading is a good way to start as a trader. However, even veteran traders sometimes use demo accounts when they want to experiment with a new strategy, switch markets, or discover how different spreads work.
Why Use a Demo Account
Newcomers to the world of finance may wonder about the benefits of starting to trade with a demo account. As exciting as the potential for gain is, inexperience can easily lead to ruin. That’s the first advice seasoned traders give to beginners. Yet it is true that accumulated real-life experience cannot be replicated in practice. There are still many advantages to get from paper trading especially in the Forex market. Real-time data and the ability to continuously study and refine your moves is a big help. Here are three reasons why you should clear your doubts about a demo account:
- Assess the performance of your strategies and learn from the times you lose without putting at risk your hard-earned money.
- Learn the ins and outs of the trading platform to utilize it efficiently. You don’t want to miss out on a real opportunity because you lack familiarity with the technology.
- Get to know the different markets and how the financial instruments work. Make use of all the types of orders that are key to success, such as: Stop Loss, Buy Limit, Sell Limit, Take Profit.
Overall, you will build up confidence and knowledge for when the time comes to use your investment funds.
Experiment With Different Strategies
There are common pitfalls that most novice traders are not aware of, and sometimes experiencing them firsthand is the natural way of learning. However, resorting to a demo account for practice can significantly increase their chances not to commit these mistakes in real-life trading settings. Here are the major issues that can be avoided:
Common error #1
Being in denial of the fact that losses are just as part of trading as profits are.
Our tip
Reduce the value of losses rather than try to avoid their occurrence.
Common error #2
Holding on to bad transactions in the hope that a trend will go back in your favor.
Our tip
Acknowledge the setback, and reduce further losses.
Common error #3
Opening several large positions in parallel and failing to manage them.
Our tip
Start small. Focus on a couple of less significant positions and aim to succeed at one of them.
Common error #4
Risk a large portion of your capital in one transaction.
Our tip
Never invest more than a certain percentage (usually 2%) in one go.
Aside from training yourself to recognize avoidable mistakes, putting multiple tactics to the test is what a demo account is for. Here are some of the ways you can do that:
Back Testing a Trading Strategy
Backtesting a trading strategy is a process that allows you to assess the past performance of a strategy. This is based on historical data, but remember that these are not a guarantee of future gains. Consequently, use this technique wisely to obtain insight into your moves and boost your confidence for quick decision-making. Of course, the longer you test the strategy, the more reliable the results.
Forward Testing on a Demo Account
Forward testing allows you to strengthen your confidence in a certain strategy. Here you can apply your back-tested results in the virtual trading environment and evaluate their efficiency without risking your own money.
Placing Orders
Finally, trading success is also heavily reliant on placing the right orders. So it is a good idea to place many demo trades and master the art of placing orders. Don’t venture to a live trading platform unless you know all about the following:
- Placing a limit order
- Setting a stop order
- Typical spreads
- Size of lots you can trade
How Long Should You Demo Trade
There is no substitute for real-life trading. Neither a simulator nor a forex demo account can truly reflect the emotional rollercoaster investors feel on their first few real trades. And underestimating the effect of emotions on your trading success is another pitfall you want to avoid. Many experts will recommend trading until you feel confident enough. But sometimes, overconfidence is the culprit behind a failure. The answer to the question, how long should you practice on a demo account, is not straightforward. But a good indicator that you are ready to move on to the real thing is the percentage of return you got on the allocated capital over a few months. Usually, this is a 6% return over 6 months of trading.
The Bottom Line
Many traders consider that the lack of financial risk when using a demo account means a novice will tend to be more reckless. That’s the effect of not having your own capital on the line. Therefore, once a beginner moves to the real platform, they may be overwhelmed with their emotional response. While using a paper trading account is a great way to test out strategies, and expose assumptions, it does not capture the full essence of trading. In addition, spending months of training does not guarantee profits in a live account. That’s why every trader must decide when to start making the move to a live environment. One thing is certain though, failure to achieve success in a demo account will certainly lead to losses in real life. Therefore, the best way to transition to a live account is to do it in a balanced way. Never refrain from going back to your practice demo account, it is a vital part of development for Forex traders.
Trail your path into the Forex Markets
OspreyFX is the perfect partner to help you on your trading journey, especially when making the transition from Demo to Live. We pride ourselves on offering our traders the right tools needed to ace the markets, traders can now trade with better insight using our Forex Calculators.