The development of a trading strategy is one of the most widely discussed items for new traders and for traders without a lot of experience. Mentors often ask new students to paper trade for a week to see if they have the discipline to trade according to rules and to keep a trading journal. Sadly, very few new traders are able to do this simple task for a week and so the debate rages over whether paper trading or demo trading actually has a place in the education of a new trader.
Some experienced traders suggest that the best teacher is experience and nothing gives the thrill of trading like having actual money on the table. It is from this sensation of having something at risk that new traders learn to be more cautious. This type of education can become expensive and may seem a way to skim money from smaller traders.
However, more conservative mentors suggest that demo trading is the only way to perfect your skills at recognizing profitable patterns and learning how to place trades on your charting software. They state that mistakes made at this point are teaching points that make for better traders, who can add value to the marketplace and its numerous communities.
Demo trading detractors argue that when you simulate trading you are not getting real quotes or fills on orders that you are placing and thus any profits and losses are not obtainable because of platform differences. They also contend that without risk, there is no emotional involvement which is a huge component of Forex trading.
Forex brokers who offer accounts to small traders offer demo accounts that are attached to the real time quotes that they provide to their real money accounts. The only difference is that in times of extreme volatility some slippage may occur. However, proponents of demo trading contend that practice trades are not so much about getting the exact point of entry, since the only time this truly counts is when you are scalping and new traders should concentrate on longer term strategies where the potential for profit is better. As for the emotional side of trading, new traders must be schooled in the feelings that will occur and be made aware of the fact that they will have emotional points attached to trades. They should also be given a solid set of rules that helps to counteract the emotional effect.
Discipline in trading is the only thing that truly matters in your trading. Most experienced, successful traders maintain a demo account as well as their real money account. They use it to test new strategies and to look for new trading opportunities. As a trader you will never learn all there is to learn about the market and so continually studying and learning is an integral part of being a currency trader.
In conclusion, it is important become a profitable paper trader before you begin risking real money in your account. As a rule if you intend on risking $5,000 in your initial trading account, it is suggested that you not place a real money trade until you have placed at least 100 demo trades and have doubled the amount of money you intend to risk. This will provide you the experience you need to go forward and enjoy your trading activities.