This week we will look into the two categories of trading accounts available to Forex traders. There is a Demo account where you practice and there is a live account where you risk your own money. Both accounts allow you to see live rates on the market while you place your trades. You will need to have a good internet connection for good rate updates as well as the connection of the software to its server. With most trading software, whether standalone or a web/mobile trader, every trade opened is saved on the brokers server as such even if you lose your internet connection your trades will still be validated based on the conditions set when you open them.
Demo Trading Account
A demo trading account opens you up to all the excitement of the market but without risking your own money. There are a number of advantages of having a demo account as a beginner trader. Almost every broker offers a demo account to its clients, if the broker you choose doesn't offer one then i suggest choosing another broker.
A demo account is where you make all the mistakes you need to make so you can learn all you need to learn. This is where you develop your trading strategy, implement risk management practices and see what your trading style is. The objective of having a demo account is for you to ensure that you are comfortable as as trader with the strategy you have chosen to use and above everything else, that your trading strategy is at least 80% profitable (more profitable is better for you, which you already know :) ).
Within particular softwares there is normally a function or a section where you can set particular criteria for you strategy and simulate it to see how it performs under certain market conditions. This function within MT4 is called a strategy tester and helps you in creating solid trading techniques. Most traders get exposed to so many different trading strategies they become overwhelmed with which one to use. The demo account is where you eliminate strategies by testing them out one by one and see which one works for you.
I have tested a number of strategies including, Pin Bar, Engulfing bar, inside bar, fakeouts and multiple others. currently I use support and resistance along with a couple indicators in my trading routine.
Another important thing to develop while using a demo account is a solid trading psychology. This will take a great deal of practice while testing out your strategies. An excellent trading psychology will be a huge determining factor for when you go live trading with your own hard-earned money. Successful traders do not do emotional trading, Everything is based on solid trading principles tied in with numbers. Too much emotion while trading is a sure way to fail fast and hard so it's essential that each trader strive to eliminate an emotional dependency while trading. I'm not saying you can't enjoy trading because you can but what i'm saying is that you should not be doing revenge trading or enthusiasm trading. Trade based on the strategy or strategies developed and stick to the numbers while always seeking high probability trades.
While practicing you can test out indicators, Expert Advisors (EA) also called robot traders as well as trading signals. These help to enhance your trading and make you a more profitable trader.
As for demo account trading capital i would suggest practicing with a similar amount to which you think you will start out live trading with. This will give you better practice as it will seem like you are trading with your own startup capital. This will help in developing your trading psychology and trading comfort. If the demo account from your broker does not offer the amount you want to start with then start with the lowest amount they offer or the one closest to what you are looking for. Most brokers have various amounts for opening a demo account.
Live Trading Account
A live trading account is where it all happens. This is where all your trading practice meets your real money while exercise excellent risk management. This is where the moula rolls in lol. The truth is it isn't always 'pretty' but as long as you stick to your strategy you will be on top of the market at least 80% of the time considering that your trading strategy is that profitable.
You will need to realize that its your real money at risk and execute your trading strategy according to practice. You will also need to recognize that you may lose some individual trades but as long as you had developed a strong strategy using a demo account then your overall profit and loss will be excellent.
Always exercise good risk management, which says you should not be risking more than 2-3% of your account capital on a single trade. Good risk management practices will tell how far your trading career will go. The importance of good risk management practices cannot be stressed enough and should always be used on every trade.
There are multiple types of live trading accounts offered by each broker. Check each one and see how it aligns with your trading goals and startup capital. Each account may offer different leverage, trading lots as well as a minimum start up capital. I've realized that almost all brokers offer between 3-5 live trading account, some even more.
I have also noticed that a number of brokers offer trading competitions where you test your strategy on a live market some times risking your own money some times not but you can win a pool prize. This is exciting and enhances your skills in different trading scenarios.
The same technical signals and indicators used in developing your trading strategy should also be employed in your live trading environment. If you have a tweaked an EA to perform the way you want it then use it.
Set goals for your live trading account and stick your plan and strategy. An important tip to remember is that, although the Forex market is liquid and lucrative it isn't a scheme to get rich over night but overtime it does pay off greatly. Happy Hunting those pips.
Additional information can be found here.
Look out for our next blog as we discuss Indicators and Expert Advisors.
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