Why Paper Trading May Not Teach You Everything You Need to Know About Currency Trading

Opening and practicing with a dummy account is still the best way to learn how to trade in the currency markets. Having said that, however, the beginning trader should realize that there are many limitations to using a paper account to trade forex and it may ultimately not teach him everything he needs to know to become a successful trader. Here’s why.

1.    You’ll behave differently when real money is on the line. Think about this: when you’re trading with fake money, you’re more inclined to make risky trades that you would never even consider if you were trading with actual money. You might choose to close out your position in a real trade rather than taking this big risk. Or you might make the trade but hedge your bets by carefully setting your stop loss orders in order to limit your losses.

2.    You won’t develop the discipline necessary to become a successful trader in the long run. When you’re trading with fake money, you can do anything you want since you know you’re not going to sustain any losses. On the other hand, if you are trading with real money, a certain healthy fear will creep in that will train you to be more cautious. But then again, it depends on your trading personality, since some traders are willing to make risky trades for the chance to make big profits.

3.    You might become overconfident. As you may have noticed by now, trading in a dummy account is substantially different from trading live. Just because you can build up a dummy account does not mean that you can do the same when you’re trading with actual money. But the problem is, you might take that attitude with you when you start making live trades, that belief that you can do anything and you’re unbeatable, which may result in big losses for you.

So does this mean that you should not learn forex trading using a dummy account? Of course not; it just means that you should be aware of the limitations of learning trading using paper trades so that you can adjust your training accordingly. Paper trading allows you to learn the technical aspects of forex trading, such as how news developments can signal trading opportunities, without having to shell out real money. However, while you’ve learning everything that you can from a dummy account, you might want to slowly start trading with a live account as well to gain practice and apply what you’ve learned in a real-world setting. Perhaps you can seek out a mentor, in the form of a more experienced trader, who can supervise you in your trades while you’re learning self-discipline and risk management. Or if you believe that you have the self-discipline, you can train yourself.