Forex Trading System Testing on a Demo Account
Before you start trading forex live you need to test you forex trading system and strategy on a demo account. Of course, you have to consider how well you can test the system on a demo account. There are certain things that you should be doing to ensure you are getting the most out of your demo account testing. If you do not do these things then you will not be testing your system correctly and you will suffer greater losses when you move to the live market.
Forex Trading System Basics
When you test your forex trading system you have to stick to the basics. Many new traders think it is okay to divert from the trading plan when they are using a demo account. The rationale behind this is that they will not lose money on the demo account because it is not real. This is actually a very bad mindset to have when you are using a demo account.
To get the most out of your demo account you have to act and trade like it is the real thing. If you lose money on the demo account you should think of it like you are losing real money. This is the only way that you can adequately prepare yourself for the live market. You also have to stick to your trading system otherwise you will create bad habits.
Consider the Differences
There are a couple of differences between trading live and trading on a demo account. You have to take these points into account when you test your trading system. With a demo account the execution time for a trade is instant and this is not the case when you are trading live. With live trading there is often a delay in the setting of a position and the broker opening it.
You also have to think about the difference in capital between the demo account and the live account. Most demo accounts allow the trader to use $10,000 in virtual currency. However, this is more than the average retail trader will be putting into their account. When you test your trading system you have to use only the amount of capital that you will have. This gives you a more realistic view of the returns you can get from your account.
The Emotions and Mental State of the Trader
A demo account is a simulation that has no actual consequences or stress. This makes it very different to the live market where you stand to lose money and are under stress when trading. One of the points you should test with you trading system is the way it helps to control emotions. This is actually very hard to do when testing on a demo account.
This is why many experienced traders use micro accounts to test their trading systems. New traders should not do this, but they should go from a demo account to a micro account. This limits the losses you face when you start trading live. It also gives you time to acclimatise to the mental and emotional stresses of the live market where there are consequences for all of your actions.