So you are a new trader – you see every broker and their brother (do brokers have brothers?) offering a demo account with virtual funds, allowing you test the waters of trading.

 

While a great (and by now standard) service, is a demo account actually helpful for new traders? Yes and no, the biggest problem with demo accounts is that it cannot replicate what it is like to have your money on the line. The emotional reaction to this is known as trader’s psychology. Controlling these emotional responses is an important component of entering the markets – and for lack of better cliché – can make or break a new trader. As a more technical definition, trader’s psychology is:

 

“the aspects of an individual’s makeup that may help determine whether he or she will be successful in buying and selling securities for a profit.”

 

Just to avoid being called a pessimist, there are benefits to demo accounts, like the ability to familiarize yourself with your brokers platform and introducing yourself to the practical aspects of trading.

 

Before you run to the trading desk (or more appropriately website) with a fistful of cash to fund your live account, there’s a little bit more information you should know. Even the most seasoned market veterans that scoff cynically at new traders getting excited for the NFP announcements, know that knowledge is one of the best risk management tools traders have at their disposal. Educate yourself in all things trading and trust me there is a lot. First and foremost, you need to familiarize yourself with the technical aspects of trading – margins, spreads, leverage – then the things that could affect your trading – technical, fundamental and macroeconomic data. Finally make sure you are familiar with risk management tools like stop-loss.

 

If you’re still a little anxious about entering the markets, some brokers offer unique tools – like easyMarkets dealCancellation. In basics this tool is like insurance for a trade, for a small fee it allows you to cancel a trade, within a define timeframe. This is most useful when an event could cause market volatility, like elections, central bank announcements or very important political events. This gives you a grace period, which hopefully you won’t need as you become more experienced.

 

So go ahead try a demo, but make sure you educate yourself and partner with the right brokers so you have access to the best tools.



 

[1] Investopedia. Trading Psychology Definition.

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