Think Like A Trader Blog

Thursday, 16 July 2015

Are Demo accounts useful when learning to trade Forex and Indices?

My answer to this question is probably going to be somewhat controversial. It's a 'yes', in that a demo account can be useful, but also with a sprinkling of 'no', for good measure... Quite a lot of the 'no' garnish, as a matter of fact.

Demo accounts are useful, especially if you're a complete novice. It gives you the ability to learn the charts and to get used to your trading platform. You can study and develop an understanding of what is going on. Everything can seem so confusing when you first start and it's not a good idea to just slap your money on the table and start trading.

I think a good analogy would be to compare a demo account to training wheels on a bike. You wouldn't just sit your kid on a bike and send them off into the street because you know they would fall and potentially injure themselves. They may also be somewhat frightened of the bike, uncertain of it because it is something so new and alien to them. Training wheels allow them to get comfortable on the bike in a safe, controlled way.

Learning to trade is the same as learning anything new. You begin on the outside, uncertain and with little practical knowledge. It can seem very daunting. It's nice to ease yourself in, to learn the ropes and build some confidence. Use a demo account as you read books and watch videos. Load indicators onto the chart and begin to understand what they are telling you. Pick out support and resistance areas and then watch and see if they are respected. Enter demo trades.

All sounds great, right? So where's the heavy dose of 'no', I hear you ask?

Well, trading is not like riding a bike. And it's not like sitting in a flight simulator learning how to fly a plane. It's very different and let me explain why: To compare it to riding a bike or learning to fly a plane you would need a little qualifier - once your training is done, you're still going to fall off your bike or crash your plane...repeatedly. Over and over again you will watch, helpless as everything goes wrong.

Trading is probabilities. You will have loss - aka falling from your bike - and you will have it over and over again. A demo account does not prepare you for this. Sure, you might THINK that it does, but believe me, it doesn't. Watching fictional money disappear from a demo account as you suffer a losing streak is easy. It's not real! It's not your money. And no matter what you think, you can't condition your mind to react in the same way.

I remember I watched a documentary which followed aspiring traders. There was a woman on it who had turned a £150,000 demo account into £1.5 million. She was confident she knew exactly what she was doing. She took her families savings of £6,000 and opened a real account. She began to trade.

At this point I knew what was going to happen. I wanted to scream through the TV that she should stop. One month later her account was below £4,000. She was paralysed by fear. Which way do you think the account went after that?

So yes, demo accounts have their use. But you wont leave a demo account as a master trader. It just wont happen. It takes time and, unfortunately, money, to develop your skill. The good news is that it's the same for everyone. I don't know a professional trader who hasn't made every mistake in the book and also blown at least one account.

I still remember blowing my first account (this after I was CERTAIN that I knew exactly what I was doing). Want to hear how that happened and how I felt through it all? Well, I'll delve into my trading diary on Monday and post it up for you.

Happy Trading (because it IS worth it)

No comments:

Post a Comment