Any new currency trader would be wise to follow some of the following advice. While the following steps will certainly not guarantee profits or success, they do provide a wise trader with risk management basics.
First, using the demo account for too long: websites like ForexFactory, MyfxBook or FxStats are full of traders who connect their Demo trading accounts, showing how great they are in the Forex market. The purpose of a demo account is for the traders to test the broker’s trading platform, to test new expert advisers, or a new strategy. For a newbie, a demo account plays an educational role. However, once a trader gets the hang of a demo account, it’s time to switch over to a live account.
One of the reasons why traders are making small profits and sustaining big losses on their live accounts is because of the emotions or they over-trade. You will never feel any emotion while trading on a demo account and definitely not over-trade.
How many times have you moved your stop loss on your demo account when the rate action was against you, because you were thinking that it could reverse. That is called hope and is the kind of sentiment you feel all the time trading on real money. The longer you stay on a demo account the more difficult it will be to manage these feelings when you decide to go on real money.
Second, do not have unrealistic expectations. Every broker offers the possibility to use a demo account before choosing to go live. As mentioned earlier, the purpose of this is to test their trading platform, see how fast the order execution is, see the spreads and other details of the broker’s platform. Every broker offers you demo trading accounts with large sums of money. Just remember you are a newbie and your intention is to learn..
Therefore, you are using the demo account not only to test the trading platform but also to learn how to trade. Although many people do end up depositing a large sum of money, some do not. To get a sense of trading on an amount more realistic to what you plan on depositing, e-mail your potential broker and ask them to set up your demo account with the same amount of money that you are planning to deposit. Legitimate, registered brokers such as FXCM will allow you to do this.
By following the above steps, you will trade on a demo account that is more realistic to real trading. This, in turn, will be very helpful for you when deciding when to make your first deposit and for how much. You will know that a 2% risk management on $100,000 account, trading 1 lot, allows you to have a 200 pips margin of stop loss while the same 2% risk management on a $200 account trading 0.01 lots (the minimum that any broker allows you to trade) will only give you 40 pips before your stop loss gets triggered.
Third and last, let’s discuss technical patterns and the trap they present for traders. The use of technical analysis is a security analysis methodology for forecasting the direction of prices through the study of past market data, primarily price and volume. Using technical analysis, we are able to identify technical patterns, which can signal to us the future direction of the asset we are analyzing.
The most well-known technical patterns are the double bottom and double top, head & shoulders or inverted head & shoulders – which signal price reversing- or triangles, which usually signal rate action continuation after a consolidation. When such a pattern is identified, many traders tend to raise their usual position size as they think of it as a sure trade. Unfortunately, nothing is sure in the foreign exchange market. Very often, over-sizing your position and ignoring your risk management could drag a huge loss on your account.
Here is some personal insight from someone who actively trades on a daily basis. Do your homework prior to trading and learn a little bit about forex. A particularly helpful resource is the forex education section from DailyFX.com. The aforementioned guide is an in-depth education section from a reputable forex news source. This will help you learn more about forex prior to trading. Next, it is advisable to stay on a demo account for as long as necessary until you become comfortable with the platform.