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Demo Trading Part II - Disadvantages

In my previous post, we tackled about DEMO TRADING and the importance of it. It is indeed a great way to get started in forex trading. It is used to be known as "paper trading". It allows you to get a taste for what type of events move markets and how they move. It gives traders who are new to forex a chance to get some 1st hand knowledge of all the nuances of live trading.

So there are many benefits of paper trading most especially to the newbies. Not only that, demo accounts do not cost anything and you can develop and test a system without a risk. But then, there seem to be found some disadvantages of using Demo Accounts.

1. NO UNDERSTANDING OF REAL RISK - The demo account saves you from potentially massive losses while learning, but does not teach you anything about dealing with the emotions you will feel once you lose.

2. DOES NOT INTRODUCE YOU TO FEAR - There is no fear when you are demo trading. If you start losing badly on a demo account - simply start a new one. So it does not teach you how to handle the emotion of fear.

3. NO SOUND MONEY MANAGEMENT - A demo account comes with a large amount of money deposited in it. These large amounts set up a psychological expectation to make large amounts of profit easily. This can encourage excessive risk taking once you switch to a live account with real money. The big difference is, when you have a live account and lose, it’s for real.

4. INTRODUCE YOU TO THE RAPTURE OF GREED - The whole point of trading is to make money and the more money you make - the stronger the pull of your greed becomes. It is intoxicating and can take complete control of you.

Conclusion:

A Demo Account is the only way one get real, in the trench battle experience without getting burned. You start by getting familiarized with the features and interface on the forex platform. That's all!

So try to familiarize everything you have to know and learn by demo trading and then try going live afterwards. You can try micro and mini accounts, so if you lose then it would not a big deal since you are not trading big money.

Demo Account is just for LEARNING PURPOSE. It's also a good way to test a system/method to see if it works before losing your money.

Excessive paper trading is not a good idea. There is a tendency for newbie traders to remain in demo trading for too long. Eventually you'll have to step out of your comfort zone and start trading with real money.

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8 comments:

Daria said...

Interesting, it just crossed my mind that someone should invent more demo accounts for learning purposes - to develop some other important life-long skills anyone could use, like: raising kids, choosing the right partner, having a pet, eating and body weight etc. LOL

Anyway, I vote FOR demo account! Very informative post

Mr. I said...

Yes, I agree. They do not give any feeling of risk that is involved and this may make us more careless when doing real trading!

FELIX TANG said...

interesting observations.

although it doesn't teach you fear, fear is what stops many ppl from investing as it is in a sense "gambling".

then again, it sounds like a really good program to hone in on ones stock market investing abilities.

i might give it a go.

Danielle said...

I always recommend to trade demo with the amount you actually have in real life. Demo trading 50k when you are plannning to invest only $10 is not going to do you any good :)

Overall, I really think that demo accounts are great and important part in learning forex.

Lisa said...

Great post. It's nice to see someone actually note the bad things regarding something.

Emily Veinglory said...

It seems to me that people leave demo trading too early. After all the skill being learn plays out long term--and you can move from demo to real bit by bit.

ray agung said...

wow do you mean about this blog?
its like a war in israel i think ^_^
sory to be honest to you, thats my work and i love it, lol

Samantha and Mr. Tigger said...

Wow!! Sounds like a good thing to learn!! We will have to come back and read some more information!
Your FL furiends,

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