When you are using a new broker, you need to spend some time demo trading before you start using real cash. It might seem like a needless hurdle, and it might feel like a waste of time, but in the end, it is going to save you money, thus increasing your profit rate.
What is Demo Trading?
Demo trading is practice trading in real time with a brokers actual trading software platform. It is essentially the exact thing as real trading, but without the risk of using real money. It allows you to test a broker out or try a new trading strategy, something that is perfect for those new to the field. However, a lot of advanced traders use demo accounts too while they learn to master a new broker or method of trading.
Where Can You Demo Trade?
You can demo trade with most Forex brokers and binary options brokers. Some stock brokers allow this, too, but it’s much rarer. If you do want to demo trade with stocks and indices, you will typically need to download a third party software. It won’t let you test out the same software, but it will allow you to practice in real time with the same assets and the same trading methods. Depending upon what you’re looking for, this can still be beneficial.
Why Demo Trade?
As you know, the whole point of demo trading is to practice. But, it goes much deeper than this. Practicing allows you to get a feel for what you’re doing, yes, but it also lets you eliminate any problems you might have with being unfamiliar with the software you’re using. User error is a huge cause of mistakes early on, especially in the fast paced world of trading. Day traders especially find themselves running into this problem. Ideally, the software should be something that you don’t even think about while trading. When you’re in the heat of the moment, you don’t want to be searching for a certain button to click, nor do you want to waste any time looking for a specific feature. Demo trading allows you to bypass this issue by using fake money for a period of time.
Furthermore, for new traders, demo trading allows you to see what it is like. Most binary options brokers require you to make a qualifying deposit into your account before you can demo trade, but within the world of stocks and Forex, you typically do not need to do this. Demo trading teaches you the basics of trading and lets you get started without risk. Even with binaries, if you decide that trading is not for you, you can simply withdraw your cash and your money will come back to you in a few days. Basically, the brokers just want to make sure that you are serious about trying their products before they give you access to this as it is better for their business this way.
Binary Options Demos
With binary option brokers like 24Option and Redwood Option, demo trading is the best way to learn new techniques. Because binaries are so customizable, demo trading is the best way to adjust your methods. A lot of people focus on a certain timeframe with binary options, such as a 15 minute expiry, and when they move away from that, using a demo account allows you to make a more seamless transition. There’s a big difference between 60 second trading and 15 minute trading, and when you are able to get some practice before making the jump, you minimize the losses that you will inevitably have.
It goes further than this. Binaries offer more than the standard call/put options. There are also one touch, boundary, pairs, and a few other exotic type trades. Using a demo account to learn how to use these more profitably will cut back on the length of your learning curve.
The only catch with binary demo trading is the fact that most brokers only allow you to keep a demo account open for three days. Stock demo trading can usually be done indefinitely, and Forex brokers typically give you two weeks. Three days is a very short amount of time in comparison. It’s not enough time to master anything except the software, but it is still a good tool to use to learn the basics of simple trading techniques and new types of trades. Just because it’s not a lot of time does not mean that it is not a valuable tool. Three days, two weeks, or forever, demo trading is an integral component of your education toward becoming a pro trader.
Making the Transition
Once you feel confident enough to transition from demo trading to real trading, you will still feel a few bumps and bruises along the way. You will be better prepared to handle these, though. Trading fake cash is much different psychologically speaking than risking money that you worked hard to earn. When you start this, you will feel a little bit of emotional excitement when you earn profits, and feel upset when you lose that money. Starting small and working your way up is the best way to get over this. Even if you have $100,000 in your account, you should try making the minimum trades for a few days just to ease yourself into it. The first few days will not make your career as a trader, but it could set you up to lose your entire account balance if you’re not careful. Starting small will help you remove the emotional tilt from your trading and boost your confidence as you see your account steadily grow.
You might not have a firm strategy in mind if you were to just jump into the markets, but demo trading allows you to formulate a sound strategy and begin to test it. You should never trade without a set of rules to abide by, and demo trading gives you an idea of whether or not those rules that form your overall strategy are going to work out for you.
Once you’re ready to begin, you will still want to look at demo trading every now and then to keep things in check. It’s not going to earn you money while you do it, but it will teach you the skills and discipline that you need to make even more money later on. It’s a tool that even the best traders should rely on once in a while.