Forex traders experience thrills and get intimidated by the market at the same time. The opportunities are endless, and so is the risk. There are different skills that a trader should possess in order to cross the market swiftly. Of all these skills, technical analysis is one that every trader should be good at. Read Full Article
Technical skills involving reading charts and patterns are essential for traders to interpret the forex market based on the currency price patterns and their repetition that the market walks on. Successful traders should be good at this long-term or short-term analysis.
However, many traders take technical analysis for granted, with some believing that it doesn’t even work. With this paradox, you may ask, Why should you perform technical analysis? How does it help traders? This article aims to help one understand the importance of technical analysis and how to use a demo trading account to become better at it.
What is Technical Analysis?
Technically, when you perform technical analysis, you try to decode historical prices to find hidden patterns or indicators that can help you predict the forex market. Tools, such as technical indicators, will give you some information about the market – which could be about the market’s volatility, direction, etc.
With this knowledge, you can develop trading strategies. Making them predict the market with some accuracy, these strategies are some rules/ guidelines that are personal for every forex trader based on their market interpretation.
But why perform technical analysis in the first place? Rooted centuries ago, technical analysis is not a new concept. At its earliest, it was performed in the Greek markets, though the agenda remains the same today: “to identify when history repeats itself.” Technical traders believe that the trading instrument’s price is a powerful indicator to predict its future. Checking how often the prices fall to the same level, they look for trends and patterns. Hence, their results are based on data-driven insights rather than gut feelings.
The Role of Demo Accounts in Learning Technical Analysis
Before we explore the benefits of technical analysis, let’s address a common misconception: the idea that trading without a solid foundation in technical analysis is a viable path to success. In reality, traders who ignore technical analysis often find themselves on the losing side of trades due to their inability to make informed decisions.
The Solution: Benefits of Using Demo Accounts for Technical Analysis
Demo accounts, also known as paper trading accounts, offer a lifeline to traders looking to hone their technical analysis skills. When you trade on these virtual trading platforms, you get the same trading environment as your live account. But the only difference is that you can execute trades with virtual or fake money. Why is this better? Imagine barging yourself into a live trading account with no skills or knowledge of strategies. You will lose as quickly as you “hoped to gain.”
Also, one of the key things that successful trading requires is a trading system. No trader has built it in a day, especially not on a live account. The purpose of the demo account is to provide you with a somewhat similar environment to the trading account, giving you plenty of room and time to develop technical skills without worrying about losing money.
Here’s how demo accounts can help you become a proficient technical analyst:
1. Developing Chart Reading Skills
Technical analysis heavily relies on reading price charts. Demo accounts allow you to familiarise yourself with different chart types, such as candlestick, bar, and line charts. You can practise identifying patterns, support and resistance levels, and trend lines without any financial risk.
Example: Imagine you’re learning to spot a double top pattern on a currency pair’s chart. By using a demo account, you can practise identifying this pattern in real-time market conditions until you feel confident in your abilities.
2. Testing Different Technical Indicators
Technical indicators, such as Moving Averages, the Relative Strength Index (RSI), and MACD, play a crucial role in forex trading. Demo accounts allow you to experiment with these indicators to see how they react to various market situations. This hands-on experience is invaluable for understanding which indicators work best for your trading style. You can open a demo account on the MT5, which is an advanced platform where you can access a larger variety of indicators and other features.
Traders struggle using MACD indicators when using them in a ranging market versus a trending market because the signal is less reliable in the former type of market. Traders who do not know the difference might end up using it in the ranging market. A demo account will teach you how this works so you can choose the right type of trading indicators.
3. Real-time Learning without Financial Risk
Demo accounts give traders a risk-free environment, which is one of their most important benefits. You do not have to be concerned about losing your hard-earned money when you execute trades, use technical analysis, or fine-tune your strategies. This freedom from financial pressure allows you to focus on learning and improving your skills.
For example, suppose you want to try a new trading strategy based on Bollinger Bands. Using a demo account, you can execute trades using this strategy and see how it performs over time without any financial consequences. On the other hand, if you apply it for the first time on a live account, you could end up doing it wrong.
Another great thing about a demo account is that you can also put your trading plan to use. When you create a trading plan, you often have to deal with a lot of values. For example, you have to find the margin you’re going to use for trading, so for that, you can use a margin calculator that gives you accurate values. Similarly, you can use a pip calculator to calculate the pips you’ve earned in your currency and a profit calculator to calculate the profits made in your currency. These calculators help simplify trading because you don’t have to carry out complex calculations manually.
4. Developing a Custom Trading Strategy and Examining Advanced Technical Analysis Methods
As traders become better at technical analysis, they want to incorporate the best strategies to get maximum results. Directly testing them on a live account can be risky and tricky. To avoid this, you can test them out in a demo forex trading account.
Suppose you want to test out Elliott Wave Theory or Fibonacci retracements. You can test this strategy multiple times to make it suitable for your trading preferences and risk tolerance. This will help you identify whether the strategy will go well with your trading system or not.
5. Overcoming Psychological Barriers
Trading psychology is a significant aspect of success in the forex market. Demo accounts help you develop emotional resilience by allowing you to experience the ups and downs of trading without risking your real money. This emotional preparation can be a game-changer when you transition to live trading.
Through demo trading, you can work on maintaining discipline during losing streaks. You can resist the urge to overtrade and stick to your trading plan. All three of these components are crucial aspects of trading psychology.
The Limitations of Demo Trading
While demo accounts are undoubtedly beneficial for learning technical analysis, some traders argue that they do not fully replicate the emotional aspects of live trading. A demo account has no real financial risk, which can lead to overconfidence or a lack of emotional preparedness. To address this concern, it’s essential for you to gradually transition from demo trading to live trading with a clear risk management plan in place.
Good technical analysis is the core skill of every successful forex trader. They can help traders build a trading system that can help them get maximum results. However, developing a trading system is not an easy feat. Systems fail all the time. Therefore, you need to practise them over and over to refine them, and a demo account is the best way to do so.
From using technical indicators to applying advanced trading strategies, demo accounts allow traders to build their trading strategies on their own, giving them the flexibility to re-work as many times as they wish. We hope the benefits we have shared in this article will help you understand the importance of a demo account for learning technical analysis and be able to fully leverage it.