I came across an excerpt by famous forex trader Jimmy Young the other day (thanks to Felix) and out of this list which was aptly titled:
45 Ways to Avoid Losing Money Trading FOREX
Point number 6 stands out the most, which reads:
Broker demo accounts are a shill game of sorts; they’e not as time sensitive as real accounts and therefore give the impression that time sensitive trading systems, such as short-term moving average crossovers can be consistently profitably traded; once you start dealing with real money reality is quick to set in.
I agree with him.
After having personally sampled many forex demo accounts I would definitely agree with Jimmy. In fact, it’s no real secret to everyone who has been around the forex game for some time most demo accounts operate on a slower server – and there’s equally good reason for why forex brokers do this: to save money.
What would be the purpose of trading a demo account?
There are a couple of reasons why you should use a demo account, but it’s not likely what you think:
Get familiar with the interface if you’re completely new to forex trading. Place a few trades, know what buttons are responsible for doing what, and structure the platform in a way that is suitable to your trading needs.
2. Testing Robots
The same goes for your robot. If you’ve just finished coding up your forex trading system then test it first on a demo account to see if it’s trading to your specifications. Use the
ChartScreenShot functions as much as possible to inform you on variables within your system.
After at least a month of testing your robot fully and confirming trades are meeting your expectations you can then move on to trading your robot live, but start real small as you’re likely to lose this money when you switch to live.
You may also want to look at demo testing using Oanda’s platform as their demo accounts don’t expire. Every time you wipe an account out, you can just deposit fake cash in. It’s an easy way to test your system over a period longer than a month. Most other forex brokers only allow you to demo trade for 1 month before they erase your demo account.
This can also make it difficult if you want to perform an audit on your performance to see where you could improve your forex trading system.
Should you manually trade on a demo account?
If you are demo trading due to some other reason than the above two reasons then you aren’t learning anything. If you’re manually buying and selling then instead of performing this on a demo account, open a live account and put an amount you’re willing to lose – start with the smallest amount possible.
You will lose it.
So if you know you’re going to lose it, just put in an amount you’re prepared to lose. In fact, you will probably lose a couple of times as you continue to learn and grow in your trading experience, so keep putting in the minimum amount until your account shows growth for several months and even then just increment slowly.
As for relying on a demo accounts results on the profitability of a system be very suspect. You would gain much greater insight into the real performance of your forex system if you opened up a live account, deposited the minimum amount and then traded the smallest lot size possible.
Several brokers around the place are beginning to offer micro mini positions and minimum account opening balances of around US$200-300. Forex brokers such as Oanda offer $1 lot position sizes.
Be careful when trading forex broker demo accounts – especially if your system trades highly volatile periods.
You can read more about Jimmy Young on his website.