Education

The benefits of trading a demo account

Forward testing your strategy :
After you have made up your mind about what and how you are going to trade, there are 2 options, backtesting and forwardtesting. The benefits of backtesting is that you gather a lot of data about your trading plan in a short amount of time. The drawback however is that there is very little involvement or emotion in it. In hindsight it's easy to see if your plan would have worked or not, but how would you have reacted while in a trade.
That's where forward testing comes in. Admitted it takes a lot more time to get confirmation of your trading plan, but you get the feeling that you are really trading, including the emotions (if you take it seriously).
Learn from your mistakes :
While forward testing on a demo account you will make mistakes like entering trades early, overtrading (too many trades), cutting profits short, being biased about direction etc ... All kinds of mistakes you make at the beginning of your trading career which will cost you a lot if you're not on your demo account. Make those mistakes and learn from them, eliminate your mistakes one by one while on a demo !
Fine-tune your trading plan :
Once most of your mistakes have been ruled out, you can really start to see the potential of your trading plan. Is it profitable ? Does it meet your expectations ? While on a demo account you can tweak it or even go back to the drawing board, it does not cost you anything except some effort.
Deal with drawdowns :
No matter how good your trading plan, eventually you will have to deal with a drawdown, days or even weeks that the market seems to turn against you. This is an awful experience but it's something we have to learn to deal with. Perfect opportunity to stick to your plan and gain confidence, eventually trade smaller position sizes until things start to work out again.

All reasons above are why I suggest trading on a demo account for a longer period of time before trading live. There are a couple of things to keep in mind though if you want it to work :

treat your demo account as if it were real money, set your starting equity of your demo to the amount that you would start your live trading account with
live the emotions of trading and learn to control them
take your demo account seriously, follow your plan, use risk, money and position size management
learn from your mistakes and gain complete confidence in your trading plan

Conclusion :
Yes, demo trading is and always is trading with virtual money, however the reality factor depends highly on yourself and how you consider it. Treat your demo account as if it was real money, follow your trading plan and gain confidence that it works (if it doesn’t go back to the drawing board). That, for me, is the best possible preparation before spending any money in the market.

One last thing : don't feel bad about the money that you would potentially have won if you were trading live, I'm sure you would feel a lot worse about the money that you would have lost. Trade your demo account as long as it takes, don't be in a rush to loose money.

What's your view on trading demo ? Do you think it's beneficial ? Leave your comments below !

Nico.Muselle

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