Is Binary Options Demo Trading the Wrong way?

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You could do a quick search online for “trade binary options”, “binary options broker”, or just about any other related term. Chances are that you’ll be met with an abundance of results, the vast majority promoting demo trading accounts. 

If you have done any sort of education for your binary options trading career — such as an online school, trading webinars or seminars, or even just read a few books or ebooks — you probably think that demo trading is absolutely necessary for beginner traders and even for advanced traders trying new strategies. Throughout the next few sections we’re going to tell how everything you know about binary options demo trading is wrong...

What Is Binary Options Demo Trading?

Have you ever wanted to start trading binary options, but simply don’t have the funds to get started? You’re not alone, many other people are also in this situation and brokers have realized this. Demo trading is quite literally “simulation trading”, a way to trade on real markets without putting your capital at risk.

You can sign-up for a binary options demo account, configure your amount of practice capital (most binary brokers will automatically set you at $50,000), set your leverage, and then you’re ready to trade!

Demo trading replicates the real markets exactly, it provides you with real-time quotes, allows you to open and close positions, review your trades, and do everything else that you would expect with a live account.

Why Demo Accounts Are so Attractive to New Binay Options Traders

The vast majority of beginner traders will not even think twice about opening a demo account, they know that it’s considered mandatory by a lot of experienced traders. Here are some reasons why demo accounts are so attractive to new traders:

  •     A demo account means no risk; you trade with “practice money”.
  •     It allows new traders to find out whether trader really is for them or not.
  •     A great opportunity to develop and refine a trading strategy.
  •     Become accustomed with a broker’s trading platform.

All of this might seem great, but throughout the next section you’ll see how demo accounts can actually be damaging to your development as a trader.

Overlooking the Single Most Important Element of Trading Success

If you’ve been wondering why binary options demo accounts are so damaging to your trading career, allow us to enlighten you: demo accounts overlook the single most important element of trading success. This is of course, your psychology — new binary traders aren’t often aware of it, intermediate traders don’t understand it, but advanced traders have mastered it.

What exactly do we mean by psychology? Well, traders are often influenced by their emotions and this can be extremely damaging because trading is a game of logic — not emotion. Here are four emotions that traders are susceptible of:

  • Hope - hanging on to a losing trade in case it turns around.
  • Fear - seeing a good trading set-up on the charts, but not opening a trade because of recent losses.
  • Greed - a trader might decide to double his/her position because of recent wins.
  • Despair - believing that a trading system doesn’t work because of a string of losses.

There are also many cognitive biases that have an effect on traders, such as the following: outcome bias, disposition effect, loss aversion, belief in the law of small numbers, anchoring, and recency bias.

Whenever you decide to trade on a binary options demo account, you’re not developing your emotional and psychological skill set. Losing a trade on a demo account probably won’t make you lose sleep, but it just might if you’re trading on a live account. This means that you’re not learning how to handle your emotions.

Your Plan of Action

Trading on a binary demo account for too long can definitely hinder your development as a trader, however, not using a demo account at all will make you unfamiliar with the broker’s trading platform and could make you vulnerable to mistakes.

When using a new broker, you should sign-up for their demo account and trade using this account until you are familiar with all the technical aspects all their platform. You should also use a demo account when testing a new strategy.

Other than that, it’s best to stay away from demo accounts. Even trading on a live account with a very small amount of capital will be more beneficial for you, simply because it will help you develop your emotional and psychological skill set; you’ll be better prepared for market movements in the near future.

Closing Notes

Hopefully you now understand that demo trading probably isn’t the best thing for your development as a new trader, however, that doesn’t mean that you should overlook demo trading completely!

Demo trading can be an excellent way to get a feel for how a particular broker operates, considering that every broker’s platform is slightly different. Although, it’s recommended that demo trading be used sparingly.