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.