3 Benefits & Limitations of a Practice Trading Account

DailyFX

Article Summary: Every trader should start with a practice trading account but many traders hold on to the practice trading account for longer than they should hoping it will bring them painlessly into the world of successful trading. Here is a breakdown of what you should expect and not expect from a practice trading account.

“The game taught me the game.And it didn’t spare me the rod while teaching.”

-Jesse Livermore

Traders are correct to start their trading career with a practice account. It seems like a perfect way to ensure yourself zero pain on your way to trading success. However, if you talk to a seasoned trader, they will soon tell you that the only similarity in their experience with a demo account and a live account is that the buttons were the same.

From the angle of what it takes to succeed, it is important to understand that we support a practice account for the following reasons:

3 Benefits of a Practice Trading Account

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Courtesy of fxcm.com/forex-trading-demo/

1. Allows You To See How Price Action Develops Around News Announcements

Many new traders are impressed by two things when first introduced to trading forex. The first is that without leverage, Forex moves relatively little when compared to other asset classes like stocks or commodities. However, when leverage is introduced on the other hand, you’ll likely be impressed with how much your capital can fluctuate when major news announcements like interest rate decision or employment claims are released.

2. Allows you To understand how to use the platform appropriately

Among the key reasons to use a practice account first is to get you comfortable with how the platform works. The last place you want to be when trying to learn how to close out a live trade is when a market is correcting against your position. If you need to know how to use a trading platform, you’re always welcome to join us for our daily trading platform walkthroughs.

3. Allows you to see how trade size can affect your overall profitability

One facet of building a trading strategy that is studied meticulously by professional but is sadly ignored by beginners is trade size. When you’re on a demo you can get a feel for the average daily move of your preferred currency pair as well as how a specific trade size will affect your account equity in a positive or negative manner. Controlling trade size is similar to controlling speed in a car and just like you wouldn’t drive a car without breaks you should learn the trade size that fits you best.

3 Limitations of a Practice Account

1. You won’t develop the healthy fear necessary for sustained successful trading

One of the worse traits a trader can have is ego that leads them to believe they can do no wrong. A common trading proverb states that, ‘there are bold traders and there are old traders but there are few old, bold traders.’ Many traders who have been around for a while have learned to be strict in their rules that decide when to exit a trade and at the same time become rather loose in their expectations as to what the market will do tomorrow because of the healthy fear that many seasoned traders have of the market.

2. You may get overconfident from only closing out big trades at a profit

Demo traders often feel like they’ve stumbled upon the easiest profession in the world because of the large trades building up their $50,000 practice account. However, they may be holding extremely large losing trades that they would not be able to float on a live account with their own trading capital. A live trading account with your own trading capital alone can help you see when the trend may be correcting so you can exit now and possible enter at a more favorable price.

Learn Forex: Recent EURJPY Corrections in an Uptrend

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Presented by FXCM’s Marketscope Charts

3. You will not see how you truly act when your money is on the line

The ability to cut your losses short and let your profits run is akin to being told to eat better and exercise. While it is the truth, it is often far more difficult in practice than in description. Trading is no different in that you must methodically work to figure out when is a good time to leave the trade, even at a loss, for you to make the progress your seek in your live trading.

Closing Thoughts

Trading a live account helps you clearly see the need for discipline and risk management like never before. Often on a demo account, discipline seems unnecessary and placing stops seems like something that was designed to prevent from making you rich whereas a live trader knows these two aspects are just as important if not more so than a strategy that allows you to decide when to enter and when to exit a trade. A great quote to leave you with comes from Peter Borish who once mentioned that traders need to have “discipline before vision” so that regardless of your belief in the next big move of the JPY, US Dollar, or Euro you have the discipline that is often developed and cemented in a live account that can help you realistically reach your trading goals such as setting stops and limiting risk. Naturally, until you can withdraw demo profits, our mission is to assist you towards your live trading goals.

Happy Trading, whether that be practice or live!

--Written by Tyler Yell, Trading Instructor

To contact Tyler, email tyell@fxcm.com.

To be added to Tyler’s e-mail distribution list, please click here.

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