Trading on a demo account is dangerous
Trading on demo account is the biggest mistake novice traders can make. It is the most counter-productive way to learn how to trade properly. At demo tradingYou are actually training to enter and exit without taking any risk. You are actually practicing how to enter and exit without taking any risk. The fact is, the greater the risk, the greater the reward. Since demo trading has zero risk, then it has no reward. It actually increases your risk for rewards when you start trading with real money because you have learned to make decisions that are not applicable in the real world. When you start making those decisions in real trading, it will lead to financial ruin.
To trade properly, traders have to have 100% technical skills, but they only have to apply 15% of those skills when trading. The other 85% have to keep their emotions under control. Profitable trading is 15% technical and 85% emotional. So, how do you keep your emotions in check?
To do this, you must determine how much money you can risk during your training, which will make trading a productive and educational experience. We are not suggesting that you risk all of your capital in every trade to make sure you are "emotionally trading the markets. We all have different financial situations, and each person will have a certain zone where some amount of money at risk will trigger a certain level of emotion. Do you think that a person with over 2 million $ of risk capital would experience any emotion while risking 100 $? If that person buys 100 shares at 20 $ and the stock goes down to 19 $, he is unlikely to experience any emotion. I am sure that if he had 10,000 shares in this situation, he would experience much greater emotions, probably much greater emotions.
No one can determine emotional level the other person. What each of us must do to make trading an educational experience is to find our "emotional level of risk." I have a friend who is just starting out in trading who has a trading account of 25,000 $. He has found that losing 100 $ creates an emotional environment for him, and the range of 70 $ to 130 $ is his emotional risk level. When this trader risks 50 $, that is an insufficient level of emotion. When he is risking 500 $, it involves too much risk and his emotions are too strong for him to think clearly and make proper decisions. After this trader got a month of trading experience, his emotional level of risk increased, so he became comfortable but still emotional at a risk of 400 $.
The secret of educational and profitable trading is to closely monitor your emotional risk level and modify your actions as needed. This can also mean lowering your risk capital. A friend of mine who felt comfortable with 400 $ had to lower that level to 300 $ after he and his wife found out she was pregnant and decided they should buy a house because their rented apartment was too small. This imposed a lot of financial responsibility and paying for their house lowered his risk capital. Numerous factors can affect the emotional level of risk, and only you can judge where that level should be. No one knows your situation better than you do. For those who are not at all familiar with live trading, demo trading can only be useful when you are studying trading platform. It is not very wise to start trading with real capital while trying to learn the software. If you don't know how to set up charts, instrument list, entry order, etc., then Demo account trading is recommended if you follow a certain set of rules. Most demo accounts allow you to trade with different account sizes. They also provide you with dummy order execution. Therefore, in order to learn trading properly using a demo account, you must follow the following principles:
1. If you are going to open a trading account of, for example, 10,000 $, make sure that the size Demo account is 10,000 $ rather than the standard 100,000 $. The reason for this is to make sure that you don't get used to risking more money than you have. If a novice trader is used to risking 100,000 $ at demonstration tradeIf he does not have the money, he is likely to take too much risk when he starts to trade real capital.
2. You should trade position sizes that are appropriate to your emotional level of risk. You should not get used to trading 100 lotswhen, in fact, you will only trade 10 lots or trade whatever number suits your emotional risk level.
3. ignore unrealistic order execution, which shows a more favorable price in every trade. Trading simulators will often execute your order at a price that would never happen in real trading. If you want to buy a stock that is currently trading at 20 $, place your order at about 20.05 $ and when you want to close the position, do the same. This helps the trader get used to order execution in real trading. You should not get used to virtual profits that never happen in real life.
4. Create real emotions during virtual trading. Find someone with whom you can compete in demo trading. For each point you win, the other player must pay you, for example, 5 $ and vice versa. (Make sure you keep a limit of 100 $ during your friendly competition). This will help bring emotion into your trading decisions.
Once you get comfortable with the trading platform software, stop virtual trading and start trading in a real account, but make sure that you stay within your emotional risk level limits during your first week. You will become a successful trader more quickly by trading with real money than if you trade in a demo account. Continuous virtual trading will decrease your chances of successful real money trading, because after doing something repetitive, it becomes a habit. By trading with unrealistic account size, unrealistic trade volumes, getting unrealistic order executions, and repeatedly trading unemotionally with no real risk, you will acquire instincts that are useless and counter-productive. When you decide to trade for real money after trading on a demo accountYou will actually be trading at a level below someone who has no experience at all. Before you can advance, you will have to get rid of all your bad habits.