Purpose of demo trading

When it comes to demo trading, you have to ask yourself what your goals are with demo trading and what you want to achieve so that you can objectively judge when you reached those goals and can move on to live trading. There are 3 main things that demo trading is for:

 

1) Understand the platform

Especially for new traders, it is important that you get to know your trading platform very intimately. You should try every button and test every feature of your platform. Thinking about how to use your platform while you are making live trades is a clear sign that you transitioned too fast.

2) Order dynamics

Depending on the market you trade, you have to make sure that you understand the different order types and also how to execute your trades. Demo is the ideal place for that because your actions don’t have any consequences.

Try to understand what the difference between a market and a pending order is. How does a stop vs. a limit order work. How can you place stop loss and take profit orders for your trades and what happens when price reaches those orders?

Just try out all different order types and observe what happens. You’ll very quickly understand what the different orders do and it’s surprising how many people don’t do this simple step.

3) Get a feel for market dynamics

Especially if you are a new trader, this part is key to avoid large losses and unnecessary trading mistakes. During your 3 months on demo trading, pay close attention to market dynamics, how price moves and note down everything that catches your attention.

Here is my checklist for things to look for when getting to know price and market dynamics:

• When does price move the fastest and when doesn’t it move?
• How do price movements differ across different markets, forex pairs, timeframes?
• Which timeframe works best for your daily schedule?
• How do news impact price movements? Which news are the biggest movers?
• What type of price behavior do you feel most comfortable with?
• Do you see lots of gaps and how can you deal with them?
• Are you OK with overnight positions?