New Currency Traders — Why Demo Trading For Too Long Is A Bad Thing

Read just about any currency trading book or forum and you’re bound to find someone beating the war drum of demo trading for new Forex traders. But, I’m not one of them. While I do think demo trading has its place, I also think that people overvalue the benefits of demo trading in the beginning. And here’s why.

The Case for Demo Trading

Initially, I think setting up a demo account is a great thing. Even if you you’re a savvy investor from another market, you still have to get your feet wet in the FX market.

Using a demo account will allow you to experience live action. You’ll be able to get a feel for how the market moves and gain an understanding of how to place your orders.

Additionally, it’s good if you demo trade with the broker you plan to use so you can get familiar with their software. As a newer currency trader it’s just good to line everything up right.

The other reason for demo trading is when you’re already actively trading and want to test some new theory or strategy. But this article is more about new traders, so that’s not really relevant.

Unlike what you’ll usually read around FX land, I don’t advocate trading for endless months on a demo account. And there’s a reason for this.

The Case Against Demo Trading

Here’s what I think. Once you have a handle on how the FX market moves and how to operate the software, you should open up a micro account somewhere. It’s possible to set these up for as little as $25 (I do recommend using more capital though).

The perfect blend: real money on the line, low entry requirement and real profit/loss.

Most traders can use a demo account and make perfect trades. And it means nothing. How will you trade when your capital is on the line? Will you trade more or less? Will you have perfect entries and exits? Will stress cause you to make serious mistakes? Will you use more leverage than you should? Will you force yourself to get more pips to make a profit because you have less capital that you did with your demo account?

By setting up a micro account you have real money on the line. Sure, if you have $100,000 in capital to eventually use in the Forex market, then a $500 micro account won’t make or break the bank. However, if you value your money, it should—to some extent—add a level of realism to your trading.

I’m reminded of poker. By the way, I don’t advocate gambling with your capital. Anyway, if you’ve ever played poker for money and then played free poker, you know there’s a huge difference. When you play those free games, it’s night and day different. There’s no stress, no risk and as a result everyone simply wagers whatever they must to see cards. In other words, it’s not helping you become a better poker player past learning how the game operates.

I view demo/paper trading the same way. It’s great for getting the feel of things, but it’s highly unrealistic. By trading with a micro account you get that realism, which allows you to discover your strengths and weaknesses and to grow as a currency trader. In my mind, someone who trades via a micro account for say 6 months is far, far better off than someone who begins by demo trading for 6 months.

Final Thoughts

Each one of us is different, so I won’t presume to know how long you should demo trade  before going live and how long you should micro trade before stepping it up. This is something you need to answer on your own. Don’t misunderstand me though. You should start with a demo account, even if you only demo trade for a week.

Regardless of the time frame, the main purpose of this article is to caution new traders who just demo trade and think that what they are doing directly translates to what they will do when their capital is on the line. You can triple your fake account every month for a year and then completely fail out of the gate when real money is on the line.