How to practise trading without risk
Reading time: 9 minutes
Online trading platforms and mobile trading apps have made it easy to access stocks, forex, gold, or any other financial instrument you wish to trade. One of the most popular ways beginners access these markets today is through Contracts for Difference (CFD) trading. But as a beginner trader, trying to trade without first practising will only spell disaster.
CFD trading allows traders to speculate on the price movements of financial instruments without owning the underlying asset. CFDs are popular because they provide access to global markets and allow traders to capitalise on both rising and falling prices. They also involve leverage, which can increase both potential profits and potential losses, making practice and risk management especially important for beginner traders.
The 90-90-90 rule: Why many beginner traders fail
Have you heard of the so-called ‘90-90-90’ rule? The rule suggests that 90% of beginners lose 90% of their capital in the first 90 days of trading. The main reasons for this are poor education and preparation, allowing emotions to influence trading decisions, and not using proper risk management. However, there is one way you can increase your chances of long-term survival in the markets, and that is by taking the time to learn and practise trading before risking your hard-earned money. Think of yourself as a trainee pilot who uses a flight simulator before flying a real jet. That’s exactly what you can do with a demo account.
Trading is a skill that combines technical knowledge, psychological discipline, and sound decision-making. You can develop all of this, while also familiarising yourself with your chosen assets, the trading platform and trading tools with a demo account.
What is a demo account?
A demo account is one of the most effective ways to learn the ropes. Think of this as a flight simulator for the financial world. It is a type of account that is funded with virtual money, allowing you to test your trading strategies in real-market conditions without any financial risk.
Today, these accounts have become highly sophisticated. They provide you with conditions that mirror the live trading environment. When you use this account, you can monitor the same price movements, same news feeds and same technical indicators that live traders see.
Practising on a demo account is especially important for CFD trading, where you might use leverage. Practising will help you understand what level of leverage suits your trading style and risk tolerance.
Key features of a modern demo account:
- Virtual funds: Start with a virtual balance which could vary from broker to broker.
- Real market data: Get market prices for forex, stocks, indices, commodities and crypto as they move.
- Platform familiarity: Learn where every button is, how to draw trend lines and how to set automated alerts.
- Execution practice: Practise placing market orders, limit orders and stop-losses until you become comfortable using them.
Best practices for using demo accounts
Simply having a demo account isn’t enough; you have to use it correctly. If you treat it like a video game, you will likely develop bad habits that will cost you real money later. To bridge the gap between ‘practice’ and ‘experienced trading,’ here are some guidelines to follow:
Treat the virtual money as real
This is the most important, and possibly the hardest, step in your learning journey. You don’t feel the same level of stress while using virtual money as you would feel when your own hard-earned capital is at stake. So, if your demo account has US$100,000 but you only plan to deposit US$1,000 in your live account, practise trading with your budget in mind. If you treat a US$50 virtual loss with the same seriousness as a US$50 real loss, you can begin developing the necessary emotional discipline required for live trading.
Master the trading platform
Technical errors can contribute to early trading mistakes. Beginner traders may accidentally buy when they meant to sell or enter the wrong position size. Spend your first week on a demo account doing nothing but platform drills. For example, open and close 20 trades in a row, set a trailing stop on different assets, practise one-click trading to understand how quickly orders are filled, and test technical indicators on price charts to learn how to use them effectively.
Backtest and forward test your strategy
A demo account is a testing ground. Experienced traders go back to it each time they want to refine their trading strategies. They backtest them, meaning they analyse historical data on the charts to see whether their strategy would have worked in the past. They also prefer to apply the strategy to the live markets only after backtesting confirms its effectiveness. Similarly, forward testing is applying a strategy in current market conditions using a demo account for at least 30 days. Check how the strategy performs during this period to fine-tune it before using it risking real money.
Practise risk management
Even in a demo environment, you should be calculating your risks carefully. For example, you should calculate the required margin for a trade as you would in a live trading environment. By performing these calculations manually during your practice phase, you can learn how to reduce the risk of unexpected margin calls in a live account.
Be aware of the psychological gap
While a demo account is a useful tool, it has one major limitation: it doesn’t involve any real money. When you lose virtual money, your heart rate doesn’t go up and neither do you experience the same emotional highs when you win virtual money. In a live account, these emotional reactions can cause you to panic or become overconfident. To overcome this, use your practice trading time to focus on the process rather than the profit. If you followed your plan perfectly but lost virtual money, consider that a successful practice session. It taught you something new.
Common mistakes to avoid when using a demo account
Here are some common pitfalls that beginner traders face. Learn how to avoid them to ensure that your practice time actually prepares you for the real world of trading.
The ‘big balance’ trap
Even if your broker funds your demo account with a large amount of virtual money, use only as much as your risk tolerance would permit while using real money. Large balances allow you to survive massive mistakes that a small account cannot. Practise under conditions that reflect your real trading goals and budget.
Ignoring slippage and spreads
In a demo environment, orders are often filled instantly at the exact displayed price. In the real world, especially during high-volatility events, you might experience slippage, where your order may be executed at a slightly worse price than you expected. Also, high volatility and low liquidity can cause spreads to widen, increasing the cost of a trade. As a result, live trading performance may differ from demo trading results.
Resetting the account
When the virtual capital in a demo account is wiped out, you can simply top up your account with additional virtual funds, almost like a ‘reset’ button. This means there are no consequences for bad decisions. If you lose your demo balance, take a break and give yourself time to recoup, learn from mistakes and fine tune your strategy. This simulates the real-world frustration of losing capital and encourages better risk management.
Over-leveraging
One of the reasons why CFD trading is popular is that it lowers barriers to entry and allows you to open much larger positions than the balance in your trading account. But since the money isn’t real while practising, some beginners tend to use the maximum leverage allowed (like 1:500) to open much larger positions than their risk tolerance would allow in live market conditions. This does not help you practise under realistic circumstances and can significantly increase risk in the live market conditions because leverage might magnify profits, but it could also multiply losses. So, practise with the leverage you will actually use.
Build solid foundations as a beginner trader
By using a demo account, you are allowed to make common ‘beginner mistakes’ without risking real money. For example, you can learn how the EUR/USD currency pair reacts to inflation data, how gold (XAU) moves when geopolitical tensions rise and how to stay calm when a trade goes against you, all without risking real capital.
Practise trading for as long as you need, and only enter live markets once you are familiar with the financial instruments you plan to trade, the trading platform and your trading strategy. Remember, the goal of practicing isn’t just to see if you can make money but also to see if you can follow a trading plan. The market will always be there tomorrow, so don’t rush into the live arena before you feel properly prepared.
Open a demo account with FP Markets
Long-term survival in the markets isn’t about being lucky; it’s about being prepared. FP Markets provides the world-class infrastructure you need to upgrade your trading skills. The demo account offers advanced tools and pricing reflecting live market conditions. Whether you want to master MT4, MT5, TradingView or cTrader, you get a wide range of tools needed to hone your skills in a zero-risk setting. Take the first step in your trading journey. Open a demo account with FP Markets today.
