Forex demo trading can play a big part in your development as a forex trader. When you start forex trading the first thing most people do is to register a forex demo account with a broker and start to “play” on the account.
They will buy or sell on the demo account without giving much thought to why they are putting the trade on.
I think this is actually the biggest mistake a trader can make, and it can lead to the downfall of many traders.
The reason I say this is because it teaches you the wrong habits from the beginning, and when you decide to switch from the demo forex account to a live account it is usually a fiasco, and you are not ready to trade live at all.
You should trade a demo account exactly as you would a live account.
You should also only start trading your demo account once your documented trading plan is in place. You start to implement your trading plan on your demo account, and then you trade the account as if it was a live account.
Only then has a demo forex account the value it should have and you use it as a tool to learn how to implement your trading plan in the market.
Here is the correct sequence of events of a trader learning to trade forex:
1. A complete detailed trading plan is documented. This should include entry method, profit target, stop loss, trade management, trading sessions, forex trading pairs and position size. This is your plan for trading the markets and it should include as much detail as possible.
2. You then start to implement the trading plan on your demo account. Trade the plan exactly as documented, and keep accurate records of every trade.
3. You are only ready to switch to a live account when you are consistently profitable for four days out of five for at least one month.
4. You then trade your live account exactly as you traded your demo account.
By implementing this trading strategy you are ready to trade correctly following your trading plan once you switch to your live account, and there is no “rude awakening” when you start trading with real money.