New forex traders are advised to trade with a demo account before moving into live trading. This is because it is a chance for you to get your feet wet without the risks associated with real time trading. Even if you are confident in your trading strategy and well versed in forex trading psychology, it’s still important to test the waters.

Impatient personalities might now be thinking, this is not for me, I want to get straight into the real money-making business. If this sounds like you, here’s the thing: even experienced forex traders use a demo account when they switch between platforms. This is because each one has different features, and it’s much quicker if you know your way around first.

No matter how well you think you will handle your first trades, a simple keying error, or delay while you work out how to access certain features, could cost you money. To mitigate against these risks, it makes sense to familiarise yourself with the set up. Demo accounts also give you the opportunity to see how sound your trading strategy really is.

All successful forex traders tweak and revise their strategies from time to time, and they will generally test these out on a demo account before going live. They may also use a demo if they want to trade with different currency pairs to their usual sphere. The same goes for people who have experience of trading other commodities.

So, you get the message, using a demo account before your first live trades is a no-brainer. The next question is, how long should you spend demo testing before going live? Like many things in life, there is no definitive answer to this question. A lot depends on how much time you have to devote to your trading, and what issues crop up during your demo period.

Here are six signs that you are ready to handle the real deal.

You have a consistent win rate

The most important factor to track your success comes down to your win rate. It’s necessary to use some method of recording your progress, preferably in a chart or graph which will present the data visually, so it can be read at a glance. Many trading platforms will have features which allow you to do this easily.

The aim is to reach a level where your profits are consistent enough to mitigate against any losses. Remember that no trader makes a win every time, and making the odd loss is all part of the game. However, if you are not making more than you lose after two or three months on your demo account, there would be no point taking that into the live sphere.

Consistent losses do not mean that you are doomed to fail, but it is a sign that your trading strategy needs a rethink. Which brings us onto the next thing…

You have a proven trading strategy

Even if you have managed to make some profit, if this isn’t backed up by a solid risk management strategy, you are not ready for live trading. Almost all successful traders win by working a strategy that gets them results, and following the rules rather than taking chances.

Having an eye for a good setup is useful of course, but this will at some point come unstuck without a risk management plan to back it up. As recent events have proved, sometimes the markets hit an unforeseen patch of turbulence, which could send your account into meltdown without a solid risk management strategy.

It’s important to work out what your risk tolerance is before you start trading, even on a demo account. Even when you are trading with no real money at stake, trade like you mean it: this is the only way to find out how well prepared you are for live trading.

Make an assessment of your income, outgoings, and savings, and work out how much money you are comfortable losing in the worst-case scenario. Remember, forex trading is as much about controlling your losses as it is about making profits.

Your head rules your heart

Forex trading call for more than a good trading strategy and risk management plan: it also requires the ability to weather difficult and high-pressure situations without losing your cool. You might think of yourself as a well-balanced individual who doesn’t get riled easily, but live trading can be a whole new ball game.

Reading up on the psychology of trading, and learning a few mind management tools is important to help you avoid falling into common pitfalls which trip up many an unwary new trader. Trading draws on our most primal human emotions: fear (of making losses) and greed (for chasing bigger profits).

These powerful emotions can manifest themselves in multiple behaviours which will impact negatively on your performance, such as panic, anger, timidity, overconfidence…you get the idea. Experienced traders learn to manage these emotions, and focus on following the rules of their trading strategy.

Losses are an inevitable occurrence, and so are profits. The key is to always balance risk and reward, so that in the long run, your profits consistently outweigh your losses. Sure, it’s fine to bask in a glow of satisfaction when you are winning, but be careful not to let this lead to overconfidence, which could tempt you to lower your defences.

Similarly, if you are successful straight away, don’t become discouraged. Most traders go through a rocky phase, or even two or three, before they hit on a strategy that works for them. Accept that it is all part of the game, and take a dispassionate look at your records to see where you might be going wrong.

Trading with a demo account gives you the opportunity to build up phycological resilience and helps you find out how good you are at keeping your cool under pressure, when your emotions might be running high.

You have traded through a change of season

Many novice forex traders overlook the fact that the markets move in different ways depending on the time of year. Having some exposure to different trading conditions over a period of at least two or three months will mean that you are in a stronger position to deal with changing market sentiments in your live trading account.

For example, holiday periods will always impact on the forex markets. This is especially true of the events which are celebrated in the US, because the US dollar is the most influential currency on the forex markets. So, the run up to Thanksgiving, Halloween, and Christmas, will always see an increased demand in consumer goods and perishables.

This will affect commodity prices, consumer spending, business and retail confidence, seasonal employment rates, and so on. The weather also impacts the forex markets; in summer, tourism and travel increases, and therefore demand for petrol and diesel. Some consumer goods will always be seasonal, such as outdoor furniture and gardening tools.

Remember that curve balls can sometimes disrupt seasonal patterns (e.g. pandemics and unexpected budget announcements), so using a demo account will give you a greater sensitivity of how all these things create different trading conditions.

You are not tempted to overtrade

New traders are often keen to try and take every possible opportunity to make a trade. However, this can lead to hasty decisions which were made for the sense of making progress, rather than because there was a genuinely sound trading opportunity. Part of the skill of forex trading is learning the patience to leave well alone until the right time.

Having a reasonable demo account period will help you to build up discipline to know when to hold back. If you do find yourself making too many trades, set yourself a daily limit and stick to it. Using stop losses and taking your profit limits can help to maintain an orderly trading system.

Make sure that you have a daily routine worked out to back up your trading strategy, to help you develop the right habits and mindset for forex trading. This is true whether you are a part time trader, fitting it in around a day job, or making a go of full-time trading.

You have sufficient funds

Forex funding is available through regulated brokers which allow you to open an account with relatively small amounts of capital. However, it’s important to trade within your means, otherwise you are likely to find trading a stressful experience, which could lead you into emotional burnout and financial difficulties. Traders may also want to get funded with a prop firm if they believe in themselves. 

You should be comfortable with your broker platform or prop firm, and understand how leverage, slippage, spreads, and all the other transactional and financial details operate. The demo account is a chance for you to work out what costs are involved, and if you have the budget to withstand them.

If you can answer yes to all of the points above, it is likely that you are ready to launch yourself into the exciting world of forex trading for real. As a disclaimer, this is general advice, and several factors could influence your decision about when to go live. Some will spend two or three months on a demo account, and others may need a year.