How Long to Demo Test Forex

Tuesday, May 22, 2012
Before you trade live with Forex, you’re going to need to demo test for a while. This is true whether you’re using fundamental or technical analysis, price action, or some other method of determining your Forex trades. It’s true whether you’ve traded another commodity before or not. It’s also true whether you’ve backtested or not. A lot of beginners ask how long it’s going to be before they can become live traders, and the answer is usually, «Longer than you think.» Beyond that it’s going to vary with every person. About how long should you plan on demo testing before you go live?

If you’re demo testing, you’ve probably already established some kind of trading method which was successful in backtesting, at least to some degree. If you have a solid foundation, you can open an account with a Forex broker and trade virtual money for free, usually indefinitely, before you invest real money in the foreign exchange market. How long you demo test is going to depend in part upon the timeframe you are going to be trading. Position traders who stay in Forex trades for weeks or months obviously will have to demo longer than interday traders who stay in trades for hours or days. Even if you’re doing intraday trading on very short time periods or scalping, however, you should plan to demo test for at least a few months before you go live.

Why demo test that long, even if you’re trading on a fast timeframe? Demo testing is about more than just proving your method works successfully and consistently in real time (though that’s the biggest part of it). It’s also about getting to know yourself as a trader. While demo testing Forex, you’re going to encounter a lot of unexpected situations. You might discover that you can only trade during certain days or hours for example — that’s something you probably overlooked with your backtests. You may find that you are too tired to trade during nighttime hours, even though you backtested that time period. Or you might find out that you have to set up a complex alert system to know when to trade. Maybe you didn’t realize how stressful trading could be in real time. There are a lot of reasons that you may find trading more difficult in demo phase.

It’s important to iron out as many of those issues as you can during the Forex demo phase, while you don’t have real money on the line. Once you deal with those complexities and understand how trading will fit into your real life and you are consistently profitable for several months, you may be ready to trade. Four to six months is a good timeframe to demo before going live (that’s four to six months of consistent profit). At a very minimum, shoot for two to three months. And remember you can always go back to demo testing if things don’t work out when you go live — it’s very common and it happens with a lot of Forex traders. You’ll also probably routinely go back to demo every time you have to make a modification to your trading method.

Factors That Affect Forex Exchange Rates

Wednesday, May 9, 2012
Whether you’re going to be using fundamental analysis or not in your trading, you’re probably curious about the factors which affect Forex exchange rates. If you’re relatively new to trading, this is a subject you may not be well versed in. The economic factors surrounding Forex are myriad and complex, so you may never have a thorough understanding of them (plenty of successful traders don’t), but the more thorough your understanding is, the more useful knowledge you have at your disposal.

Some of the main factors which affect Forex exchange rates include interest, inflation, trade balance, speculation, foreign investment, and central bank intervention. Interest rates and inflation are interlinked concepts. When inflation is high, central banks in countries may raise the interest rate for borrowing money, which reduces consumer spending in turn. When inflation is low, central banks may drop interest rates to indirectly encourage consumer spending. Currencies that have higher interest rates offer a more substantial return, so oftentimes Forex investors will buy into them and sell currencies with low interest rates to make a profit. Doing this over an extended time period is known as a carry trade.

Balance of trade (a country’s imports vs. that same country’s exports) may also impact the level of demand for its currency. When a country exports more than it imports, that country has a positive trade balance, and there is more demand for that country’s currency on the Forex market.

Speculation from large and small investors may also impact the values of currencies. Traditionally it has been large investors that really move the market (usually not private traders), though retail spot Forex traders now have more of a measurable impact than they used to. Traders speculate based off of many different things including economic reports and news. Similarly, investors often flock to currencies they perceive as «safe.» For a long time that was the US dollar. When confidence in a currency drops, investors sell that currency off. Both actions can impact the value of the currency.

Finally, raising and lower interest rates aren’t the only way in which central banks can intervene with their respective economies and alter the values of currencies. Central banks may also engage in quantitative easing, which is a last resort to resolving economic difficulties if lowering interest rates fails. This is a way in which central banks can increase the liquidity of a country’s banking system. Too much of this and the country’s currency may lose value, which is why it is risky and a last resort.

As you can see, there are many different factors which drive the fluctuating prices on the foreign exchange market. To actually trade fundamentals involves a tremendous amount of research; even among professional economists there is a great deal of disagreement as to how things really work. Nonetheless, trading fundamentals does work well for some Forex traders. Whatever you choose to do, do thorough backtests and demo tests before you trade with real money. Never speculate wildly-have a method in place for your decisions.