A demo trading account is your lab

Just as a scientific laboratory is a space equipped for experiments and research, your demo trading account is a place where you can test different trading strategies and investigate new markets and products.

In this lesson, we’ll look at some of the useful things that a demo account enables you to do, such as using charts and trying out numerous trading strategies.

Important basic terms

Before you can explore some of the more useful functions a demo trading account offers, you need a basic understanding of how to navigate around your account, and that includes knowing some key terms. These features might not be available on every demo platform, but it’s good to keep them in mind as you start your journey.

• Workspace: as with a live account, this is the area where you can access the various trading instruments you might want to experiment with, including indices, forex, shares, commodities, bonds, exchange traded funds (ETFs) and options. From here, you can open separate windows to display information you want to view, including charts and graphs, alerts, buy and sell executions, orders, etc. You can add and save additional workspaces to prepare for specific events and markets, and tailor each one to suit your needs
• Watchlist: a watchlist is an important tool in your trading. It helps you to group potential assets to trade together in a single, easy-to-find spot. This means you don’t have to manually search for markets every time you use the demo account – you can streamline your trading by accessing your watchlist(s)
• Trading charts: charts are visual representations created by an asset’s price movements over time. They can provide traders with valuable information about an asset’s price, and help them make estimations about future movements. Trading charts can create recognisable patterns, helping traders to source information about what the price of an asset might do next. While nobody can predict with absolute certainty how a market will behave, it’s a common principle that chart patterns tend to repeat themselves. There are various types of trading charts, with the most popular ones including line, bar and candlestick
• Trading plan: before you start trading with your demo account, you need to know what your plan is. What are your goals and how will you achieve them? This is your trading plan – the strategy you would implement in a live account. However, in a demo account, your goals might be different. For example, if your objective is to improve on your weaknesses, rather than playing it safe (as you might with real money on the line), you might use the demo account environment to work on markets where your trades consistently underperform. You can make decisions (that you wouldn’t normally in a live environment) to see what would happen
• Hedging: although it sounds like a gardening term, hedging is actually about trying to insure yourself against factors that might negatively affect your financial position. You can’t stop negative events from happening, but hedging strategies are an attempt to protect against the impact if and when they do happen

Now that we’ve pinned down some of the definitions, let’s explore what you can do with graphs and charts.

How can I use graphs and charts?

Charts can help you to interpret the behaviours of buyers and sellers to give you an indication of where the market could go next. As you'll notice when you look at a chart, the market will usually move in one overall direction or trend. There are three types of market trends: uptrends, downtrends and sideways trends.

There are several important principles to bear in mind when trading with charts. The first is that while they may form part of your technical analysis, they should never be used in isolation when making a trading decision. Ensure you combine your chart analysis with fundamental analysis and refer to your trading plan before opening any positions.

Also remember that while trends and chart patterns could be indicative of future price movements, they’re never guaranteed.

There are, however, certain chart patterns that traders may use as indicators when deciding to take a position. For example, the three white soldiers candlestick pattern might be used in determining a price reversal following a downtrend, while the ABCD trading pattern can be used in predicting future stock-price swings.

It’s also worth exploring different types of charts. For example, a Renko chart comprises ‘bricks’ that show only significant pricing trends. You can find out more about Renko charts and how to use them here.

To use charts in your demo trading account, search and select the asset you’re interested in trading and add it to your workspace. Select the specific details (for example, if you’re working with forex, choose the currency pair you wish to view), and you’ll see a chart (it will be the default one). You can then use the available indicators – from Bollinger bands to relative strength index (RSI) – to analyse the chart. You can also use drawing tools to highlight key trends, patterns and levels. When you’re ready, place your trade in the deal ticket.

Which trading strategies should I try?

There are many different trading strategies you can use. The one(s) you choose to implement will depend on your personality, risk profile, interests, goals and resources. However, there are several popular strategies you may want to consider as you explore the possibilities your demo trading account offers you. In this lesson, we look at three.

News trading strategy

Traders using this strategy base most of their trading decisions on news announcements, because the financial markets usually react to these kinds of developments. Trading decisions are based on how the trader believes breaking news, economic reports and company declarations may affect an asset’s value. In the industry, there’s a saying ‘buy the rumour, sell the news’, which refers to traders opening a position on speculation ahead of a news announcement that could affect an asset’s price. Read more about how to trade the news.

Swing trading strategy

Swing trading is a popular short-term-focused trading style that centres on the goal of capturing a portion of a larger move. Swing traders will take smaller but more frequent gains, cutting losses as quickly as possible.

Within the category of swing trading, you get trend trading and breakout trading:

• Trend trading: using technical indicators to identify the direction of market momentum. Swing trading strategies seek to capture a portion of this trend, taking advantage of the swing high or low. Read more about how to start trend trading
• Breakout trading: taking a position as early as possible within a given trend to try to capitalise on the market movement. Swing traders will look to identify points at which the market is about to ‘break out’ from the range in which it has been trading – typically when a support or resistance line is broken. Read more about how to approach breakout trading

Position trading

This is a strategy where the trader holds a position for a longer period of time, ignoring small price fluctuations and aiming to profit from long-term upward trends. While there’s more room for reward, the inherent risk is also higher as position traders might ignore minor fluctuations that go on to become full trend reversals, which can result in significant losses. Position traders use a variety of tools, including fundamental analysis and market trends, to make trading decisions. Read more about position trading strategies.

For more information on different trading strategies to test, and markets to try, visit our webinar library.