Most brokers offer simulated forex trading through their chosen trading platform(s). What this means is you can trade using the exact same software you would be if you were trading with real money, except you don’t use real money. In order to learn trading and investing on the forex you’re allowed to practice on a demo account that has a fake money in it. You can usually set the amount of money in the account, as well as the position sizing (standard, mini or micro lots), and you can reset the fake account back to its original amount at any time. The best way to begin is to set the parameters to exactly what they would be were you to open a real live online forex trading account. There are some both benefits and drawbacks to simulated trading, and we’re going to discuss both here as well as some demo currency trading tips.
Benefits of Forex Simulated Trading
The biggest benefit to trading with a forex simulator is that you learn the mechanics of your broker’s trading software. This ensures you’ve worked out how to enter the various types of orders (limit, market, stop, etc.) before you have any money in the game. Another big benefit of forex simulator trading is that you get a feel for how the market moves and how each pair moves on a daily basis. Some people specialize and study just one specific pair because that pair has way of moving on a day to day basis that suits their trading personality. This time with your demo account can allow you to learn whether or not you have a bias towards one pair or not. The final benefit we’re going to talk about is that this demo trading allows you to get a feel for how forex margin actually works. You can read about the math of margin all day, but until you really see how much currency you are able to purchase compared to the amount of money in your account, you can’t really grasp the amount of power and leverage it grants you. You’ll be able to see just how much you’re probably going to lose when you trading, or gain if you’re very lucky or you stick with it long enough to really learn how to trade.
Negatives of Simulated Forex Trading
A lot of people believe you should skip the step of trading on a demo account. This is because trading involves a lot of emotion, and without any real money in the market, it’s difficult to gauge how you might react in these high-emotion situations. A forex trading demo also allows you to develop bad habits. That account reset button allows you to renege or call a mulligan on bad trades or poor trading days; this doesn’t happen in a real account. In a real account you lose real money and there’s no reset button to make yourself feel better about your day. Further, another bad habit that might develop as a result of having easy access to that reset button is taking excess risk, and taking trades you never should and never would if you had real money on the line. You’ll start winning some of there trades, and start to falsely believe you’re a great trader, then when you go to put real money in an account, the fx will quickly show you your mistakes and hopefully you don’t go broke in the process. Finally, there’s a big difference with how trades play out in a simulator as opposed to how they get filled in the open market. While the foreign exchange is the most liquid market in the world, there are situations where your order might get hung up for one reason or another, especially depending on whether your broker uses a dealing desk or not. This doesn’t happen in a simulator – orders are always filled immediately and this is unrealistic and makes it difficult to get a feel for how the real market will operate.
Forex Simulator Trading Tips
If you do go the demo account route, there are some things you can do to help you transition to real trading. First, use the demo account mostly to learn the mechanics of trading. This means how orders are entered, how to set alarms and alerts, and other things that will be basically the same on a demo or real account. Second, try to remain disciplined and trade only as you would in a real account. Don’t get carried away with the fact that you can set yourself a large account limit, or have a reset button on hand. And thirdly, move on to a real account as quickly as possible. Don’t rely on your demo account to give you real feedback on your skills as a trader, and don’t wait until you’re successful on a demo account before you move on. You might have wasted 6 months learning terrible habits, that you don’t any real idea how the market operates, and that you can’t control your emotions when money is on the line.
Simulated forex trading has its place in a trader’s tool kit, but it should be for a quick introduction and education on the basic mechanics of software, trading, and charting. Considering the fact that you can trade in mini and micro lots, there’s really no reason not to have at least some money in the market when you’re learning how to trade. A dollar a pip is a very cheap education compared to how much you might make if you stick it out, really learn how to trade, and inevitably become a successful trader.
