In a recent post titled “How Do You Backtest a Trading Method?”, we explained how you can conduct a backtest once you find a trading system you like for forex.
After completing a successful backtest, you might think you are ready to trade. But there is still one more step before you go live with real money, and that is to conduct a demo test.
Demo testing is important for multiple reasons:
- You get to know the trading platform, and avoid making unnecessary mistakes placing orders.
- You make sure the broker you are considering using really is a fit for your needs.
- You check whether your trading method fits your schedule.
- You get used to the psychological challenges of trading live.
We could easily write a whole other article about the benefits of demo testing. But in this article, we are going to walk you through how to demo test.
1. Choose your broker.
Before you can demo test, you need to pick a broker. The full details for how to choose a broker also would require another post. But suffice to say, the broker needs to accept traders from your region and offer lot sizes that fit within your trading budget.
2. Open a demo account.
The next step is to open a demo account with that broker. When you register your demo account, make sure you provide accurate information. That way, when you open your real account and submit your KYC documentation, you will not produce a mismatch.
3. Watch the charts for opportunities.
Next, you will need to figure out the approach you want to take for planning your trades and executing them with respect to platforms. There are a few different options here:
- You could watch the charts, plot your indicators, and trade all through the proprietary trading platform your broker offers.
- You could watch the charts and plot your indicators on a third party program like MetaTrader 4, and then place the actual trades through the broker’s platform.
- You could do everything through MT4. This may be possible if you are using a supporting broker. You just have to link up your demo account and MT4.
There is no single “best” approach that will suit everyone. You will just need to play around with your options and figure out what is working best for you given your personality and trading method.
Once you decide where you want to watch the charts, start keeping an eye on them.
4. If you see a setup that fits your rules, trade it.
Look for potential trade setups, just as you did when you were backtesting. If you have a high-quality setup, you can trade it. Try and make the same trading decisions during your demo test that you would have made backtesting.
When you enter your trade, be sure to set up your stop loss and take profit.
5. Exit your trade when you are ready.
Exit your trade according to your rules. Depending on your trading method, you might get out at the take profit or stop loss, or you might exit early. With some systems, you might also trail your stops.
6. Record your win or loss in your spreadsheet.
When you exit your trade, the amount of virtual money you won or lost will be recorded by your broker.
But you should maintain a detailed spreadsheet, just as you did when you were backtesting.
If you do not, you will fail to record all kinds of information that will be critical to look back on later, and which your broker cannot keep track of.
Your spreadsheet should include these columns:
- Buy or sell
- Reason for entry
- Entry price
- Exit price
- Profit or loss amount
- Notes for each trade
Once again, you should also be tracking a variety of useful statistics. See “How Do You Backtest a Trading Method?” for more details.
7. Rinse and repeat.
Continue to demo test, taking viable trade setups as you find them and recording the results. Once you have enough data to determine that you are profitable, you may be ready to progress to live trading with real money.
Take Demo Testing Seriously
As with backtesting, if you want to make demo testing worthwhile, you need to treat it just as seriously as you would if you had real cash on the line.
You need to put yourself in the mindset of real gains and losses as much as possible. This will help you to make the same decisions you would in real life, which will give you the best understanding of what you can expect when you do go live.
Frequently Asked Questions About Demo Trading Forex
Q: How long do you have to demo test forex?
A: The standard recommendation is that at a minimum, you should demo test for two months, and consider going anywhere up to six months.
That said, if you have a system that does not generate a lot of trades in a month, you should definitely lean towards demo testing longer. If you try and jump right into live trading after just a couple of months, you might have insufficient data to determine whether you were really “profitable” in demo. At that point, you have no idea what to expect.
Q: How many currency pairs should you demo?
A: That depends on your trading strategy, but it is often wise to just start by testing out one pair.
Q: How many trades should you open at once while demo testing?
A: This also depends on your approach to FX trading. It is fine to open more than one demo trade simultaneously, but just make sure that you are not trying to do too much at once. If you lose focus, your results could suffer.
Q: What do you do after you finish demo testing?
A: Once you determine you are profitable in demo, you can proceed to open a live account with your forex broker. You can then make your first deposit and start trading.
We recommend that initially, you trade with a smaller amount of money than you plan to use to fund your account in full. Trading with real money for the first time can be psychologically startling. Starting small will make the adjustment easier (and potentially less costly).
Where Can You Demo Test Forex?
Many forex brokers offer free demo accounts to prospective traders. Take a look at our FX broker reviews to find out where you can open a demo account right now. You may also be interested in reading about forex demo contests.