Innately unpredictable, the forex market is full of risks. Thus, it is recommended to trade first on a demo account to develop an understanding of the market. A type of virtual account – a demo trading account, is almost the same as a live account: traders get the same trading environment and expect zero risk because they trade with fake currency.Get More
This is the primary reason why they are recommended for learning. But mistakes happen, whether you trade on a demo or live account. Some of these mistakes that traders make are clingy, taking them along in live accounts, thus further increasing their risk. In this article, we will look at nine of those mistakes. We will also provide you with the solutions you need to take to avoid doing the same in live trading.
- Treating the Demo Account Like a Game
One of the most common mistakes traders make with a demo account is treating it like a game. We have all done this! We take everything for granted when we do not have anything at risk. Since traders demo trade with virtual funds, there is little fear of losing money. Hence, many do not follow the rules. However, this approach could have drastic consequences, leading traders to set unrealistic expectations. To avoid this mistake, you should treat the demo account as if it were a real one. Use the time spent on your demo account to test your trading strategies and learn from your mistakes.
- Not Having a Trading Plan
Another common mistake traders make on demo accounts is not having a trading plan. Now, you might be wondering: I’m not risking money. What do I need a trading plan for? Though you’re practising trading on a demo account, you shouldn’t forget that you are still trading. Whatever actions you take here, you are likely to follow them when trading in your live trading accounts. Also, if your plan is bad, the risk will worsen on a live trading account. So, focus on building a good trading plan. Outline your trading goals and learn to implement robust risk management. Your entry and exit goals will determine how well you execute your trades. Therefore, treat a demo account like a live account and execute it like you would a live account. This will also help you avoid making impulsive decisions and taking unnecessary risks.
Since the risk factor is non-existent in demo trading, forex traders try every hook and crook to earn money. And over-leveraging in one of those methods. However, this could go wrong on so many levels if not done thoughtfully. The problem is that over-leveraging will inculcate bad trading habits in you, which you are likely to continue when doing live trading. This can put your trading account at significant risk, as over-leveraging can lead to large losses and wipe out a trader’s account. You can avoid this by choosing leverage wisely. This is where margin calculators can be tremendously helpful. For any given leverage, they can help you find out your margin and manage your risk.
- Lack of Time Horizon
What’s the right time to trade? This is one of the first questions that forex traders ask when trading because the volatility of forex currency pairs varies. In demo trading, many traders trade randomly without paying attention to time or how long they should hold a position. This lack of approach will lead to poor trading decisions and missed opportunities in live trading. You can avoid this by following a specific time period and trading style for yourself.
- Minimal Research
Minimal research is a common mistake that traders make on demo accounts. All currency pairs move differently. There are different social/economic reasons behind their movement that you should know about so you can place trades successfully.
When trading on a demo account, traders ignore this, as they are more focused on learning technical analysis. However, it is best to incorporate fundamental analysis during your early days of learning. The combination of these two analyses will help you win more trades.
- Poor Risk-to-reward Ratios
It is common for new traders to avoid their risk-to-reward ratios on demo accounts. This is the biggest mistake that a trader can commit because you should know your risk tolerance. There are many downsides to this. One of them is not knowing when to close a trade, as you would fail to set a certain profit target in your mind. Moreover, if you trade without a risk-to-reward ratio, you will end up risking more, which could lead to higher losses.
- Emotion-Based Trading
Emotions are out of the picture when demo trading because there is no fear of losing. However, traders are impatient with their decisions when trading live because they fear losing money. Understanding this difference in trading mindset can prevent emotional-based trading. When you demo trade, think of trading as if you were trading with real funds. Do not take it casually! This will help you be more cautious about your trades and trade with them with proper risk management. Moreover, it will help you bring your emotions under control.
- Trading on Numerous Currency Pairs
Even though you get a plethora of trading currency pairs, not all pairs will make your pairs. The reason is that not all pairs are liquid. Therefore, do not switch pairs every day. Pick one or two pairs and test them. Major pairs are stable pairs with decent returns. It is recommended for new traders to choose any one of the major pairs and become good at it. After you can earn steady returns, you can think of diversifying your portfolio. To do this, you can pick a new pair and test it on a demo account until you feel ready to trade it on a live account.
- Not Reviewing Trades
If you keep making all the above eight mistakes, you will naturally end up making this one. It is important for all traders, even professionals, to review their mistakes. Constantly moving, the forex market is dynamic and unprecedented. When you lose a trade, it is important to look back at it. It is easy to ignore your trades on a demo account because you are not really losing anything. But in terms of learning, this is the biggest mistake on your part. So, keep a record of your trades and see what worked and what went wrong. Self-analysis will help you identify the issues in your trading system and work on its improvement.
Demo or live, it is common for traders to make mistakes. What matters is what they make of them. In this article, we have discussed the top 9 mistakes that traders make in demo trading. These are not excuses but rather a chance to improve their skills. Some of these mistakes are overleveraging, not following a training plan, lack of self-analysis, etc. The root cause of all these problems is not taking demo accounts seriously. If your long-term goal is to become a successful forex trader, then you should do demo trading with the same mindset as if your real funds were at risk.