Many wonder what's this fuss about opening a demo account. They say "demo account is for losers, I got real money and why would I want make PAPER money, when I can make REAL money?"
And those who said that above statement are part of the 90% of traders - Majority (follow the crowd right?) who lose money.
Although there are countless reasons why one shouldn't commit their resources to LIVE trading account immediately. There are THREE important reasons I would like to outline.
- Demo account is really a "free demonstration" (a pitch, if you like) by your FUTURE brokerage company - they want your business, they say they are the best in the industry - don't take their word - create a demo account and test them out.
- Demo account allows you to understand spreads, leverage, execution speed, trading platform familiarity, generating reports & much more - and most of all understanding your OWN trading skills or lack thereof.
- Demo account - if anything - should make you realize that "oh! I will just place the required $300 into a LIVE account and check out my brokerage, while I double the money" is a myth - for those of you who think this way - your right-on-track to financial doom. Please take time to read "Tools for a Master Trader" and a host of other books - which explain in detail the biggest mistake a new trader makes - entering the world of trading WITHOUT enough capital - its a BLUNDER!
Let me dig a little deeper on the 3rd point - which has sucked many a good people into this vicious cycle - of adding "small-amount" of funds to "curtail MAJOR losses".
Scenario1: Let's say you have $1000 in your MINI-TRADING account - which has a leverage of 200:1 (so for every $50 - you can buy ONE lot of currency worth 10,000 units) - simply put: every PIP is worth $1 for eur/usd pair.
You place a trade and market moves 50-pips against you - you close the trade. You lost 5% of your capital.
Scenario 2: You have $300 in capital (the small amount required by forex brokers to open a mini account) - same leverage and market conditions as scenario 1.
You place a trade and market moves 50-pips against you - you close the trade. You lost 16% of your capital.
If you have a "losing streak" and lose the same amount of pips 3-4 times - your trading account with $300 will come to a screeching halt - you don't have capital to trade. Worse, if your last trade was winner - which didn't have the "wiggle room" - your broker will issue a "margin call" liquidating ALL your positions - even the winning trade. So what do you next? - you go back and deposit another $300. And the wheel goes round & round.
We suggest that you wait until you have ENOUGH capital to trade - capital that DOES NOT effect your lifestyle, money that is NOT borrowed or otherwise set-aside for emergencies.
Use that capital to trade - open a LIVE account ONLY after you have demo-traded ATLEAST for TWO-MONTHS consistently.
Capital is your blood. Losing blood will deplete your body and likewise losing capital will deplete your trading account - which comes to a stand-still.
Rule #1: DON'T LOSE CAPITAL
Its better to have lost an opportunity than capital.
Happy Demo Trading.
Ps: did you know SUCCESSFUL traders demo trade for LIFE?!!. Yes! every successful trader demo trades on the side - if they have new ideas (ma crossovers, rsi-stochastic combinations, etc) - they first backtest them, then LIVE-TEST them on demo trading accounts - before they commit a dime on LIVE accounts.
Be a successful trader - its a journey. Demo accounts are your best friends.
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