Posts Tagged ‘demo account’

Testing a forex system is not as straightforward as making one or two trades. To fully test it, you need to run 3 tests - back, forward and live. For instance, if you needed to test the Forex Spectrum programme, you’d run a test with historical data (back testing). It would show you the way in which the system would have performed had it run for a time period. Then you’d run it on demo account to find out how it performs with real time info. And last but not least is the live testing, that is running the system on live account. It’s different from forward testing because there are additional factors that aren’t present in demo accounts, for example slippage, delays, spread and other variables.

A lot of people who develop an interest in currency trading begin by coming up with a trading method and then making a note of the trades it generates to see how they would have performed. This type of trading is referred to as paper trading and is extremely popular with many wannabe traders.

In the world of forex trading, paper trading can be a very fruitful exercise because you can test out your trading strategy without putting any of your trading capital at risk. If they don’t perform as you would have liked, you haven’t lost anything, and you can simply start again with a different strategy.

Similarly if you join a forex broker that enables you to trade with a demo account, you can open and close trades using pretend money. So this enables you to familiarize yourself with your chosen broker’s trading platform, and will be of benefit to you when you begin trading with real money.

The problem associated with paper trading is that it can never truly replicate the feelings and emotions you experience when you are actually putting your own money at risk. When placing trades on paper it is unimportant if they end up going wrong, but when entering real positions your heart will be racing and your trading decisions may not be as rational as before.

There is also the fact that if you simply place your dummy trades down on paper, the results may be misleading because the spreads may be greater when trading for real. In addition your decisions may have turned out to be different when trading with real money.

So the point I want to make is that although paper trading is a good place to start, you be wary of the fact that live trading is a lot more difficult. Even if your system is consistently generating winning trades on paper, it doesn’t necessarily mean that you will achieve the same results when trading with real money.

Not many people generate profits from forex trading straight away, and many people lose a large percentage of their trading capital before they start to develop into a profitable forex trader.