Simulated Forex trading

Becoming successful in anything in life requires dedication, patience, and experience, and trading is no different. Simulated Forex trading can fast-track your journey as a trader by providing a risk-free and convenient way to trade the market. It's almost the same as real trading – the price quotes move the same, you have the exact same charting tools at your disposal, and can open and close trades just like you would with a real account. Let’s take a look at the benefits of simulated Forex trading and how you can start to practice and test your trading strategy in a simulated market environment.

Benefits of simulated Forex trading

Simulated Forex trading offers the exact same trading environment; only risk-free. It allows you to practice on historic price data, which moves with upticks and downticks and replicates the usual trading experience you would have with live trading.

These are the main benefits you get with simulated Forex trading:

  1. A risk-free environment: A Forex simulator allows you to place trades on a demo account without the risk of losing real money. This helps to focus solely on your trading performance, since emotions are minimised with virtual money.
  2. Live simulated quotes: All price quotes on an online Forex trading simulator move the same as in real trading.
  3. Adjustable timing: While in real trading you need to wait for that daily candlestick to close, you can adjust the speed of the Forex market simulator to get more candles, more trades, and more practice during a short period of time. You can see that one day's worth of data appears in only one minute on a good Forex simulator!
  4. All the tools of your trading platform are at your disposal: While embarking on your simulated trading adventure, you can use all the tools of your trading platform to analyse the market. This helps to familiarise yourself with not only the tools, but also with the various features of the trading platform itself.
  5. Test dozens of strategies risk-free: A Forex training simulator also allows you to test various trading strategies and pick the one that produces the best results. Make sure that the strategy matches your personality and trading style, and test it in a risk-free environment before moving on to a real trading account.


Look for live price feeds and flexible deposits

Another nice feature of a real-time Forex simulator is that you have the flexibility to set any account size you want. As a general rule of thumb, your demo account size should be roughly the same size as your potential real account. This means that if you intend to deposit $5,000 in your real trading account, then you should open a demo account of the same size. By trading on a demo account like this, you’ll get a better feeling for the winnings and losses you make during your simulated trading and can experiment with various risk management guidelines and risk-per-trades that produce the best trading results.

When choosing a currency market simulator, make sure that the software features live and real-time price feeds. Try to avoid demo accounts with brokers that don’t offer real interbank rates on their demo accounts, since even a small difference in the price quote can lead to your Stop Loss or Take Profit levels being executed. Fortunately, most brokers and trading platforms offer real-time and accurate price-feeds nowadays, so you can solely focus on your trading results.

Use a demo account for practice

A demo account is basically a Forex simulator account, since you need a demo account to start simulated trading. Using demo accounts in your early stages of trading has many advantages. You can practice trading, try out new trading strategies, and gain experience without any risk of losing real money. Generally, you should be demo trading until you feel completely ready to open a real account, and are able to generate consistent returns on your demo account. Depending on your learning curve, this can take up to a few months – but don’t worry, all the tips and tricks you learn during your demo trading can be effectively applied to a real account as well.

Demo accounts are also a great way to develop and improve your risk management, which is crucial part if you want to become a successful Forex trader. Naturally, there’s no way you can use a real account with historic price data, which is why opening a demo account is absolutely necessary if you want to take full advantage of your free Forex trading simulator.

Choose a powerful trading platform for simulated trading

The trading platform you use in your daily trading will have a significant impact on your trading performance. Traders can spend hours in front of their platform every day, especially if they follow a scalping or day trading strategy. Also, once you have finished simulated trading, it’s important to choose the trading platform that you intend to use with your real account as well.

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One of the most popular trading platforms among retail traders is the MetaTrader 4 platform. It basically offers all the necessary features you might need in your daily trading, including advanced charting tools, a range of market orders, flexibility,  a user-friendly interface, and a large and supportive online community.

In addition, the MetaTrader 4 platform also allows for simulated Forex trading, either manually or automated through its built-in Strategy Tester. How to use the MetaTrader 4 platform to simulate a real trading environment using historic price data will be explained in the following lines.

Manually backtest your strategy using MT4

MetaTrader 4 is full of features that support and enhance your trading. One of those features also allows you to manually backtest your strategy and simulate a real-time market environment using historic price data.

Simply open your MetaTrader 4 and choose your preferred currency pair and timeframe. After that, scroll your chart to some point in the past, and hit the F12 button on your keyboard to scroll the chart bar by bar to the right.  

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Make sure that the button titled “Scroll the chart to the end with tick incoming” is deselected, as in the following picture, or the chart will automatically scroll to the last price with each new tick.

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You can also hit the right arrow on your keyboard if you want to increase the speed of your simulated trading. This will scroll three bars at a time.

This feature of MetaTrader 4 can help you a lot to familiarise yourself with the platform, your trading strategy, and the various charting tools that MetaTrader features by default.

Once you’re done with a certain timeframe and currency pair, make sure to simulate your trading using a different timeframe and pair. Not all timeframes and currency pairs behave the same under the same market conditions. Longer timeframes usually return better results with technical trading methods, and different currency pairs can respect different tools or make specific chart patterns over and over again. Make sure to simulate your trading using different timeframes and currency pairs.

Always use stop-losses, even on demo accounts

Stop Loss orders are a crucial tool of any risk management strategy and should be used even on demo accounts. The reason for this is that you need to get used to using Stop Loss orders on all trades you make, and beginning early on your demo account is a great way not to forget them on your real account.

Stop Loss orders prevent large losses and preserve your trading account by automatically closing an open trade once the price reaches the pre-specified price level. There is no effective tool to manage losses without Stop Loss orders (except mental Stop Losses, which we don’t recommend), and all profitable trading strategies include a strict rule of where to place your Stop Losses when following the strategy.

Automated backtesting on MT4

MetaTrader 4 also lets you simulate the results of trading robots called Expert Advisors. Expert Advisors are computer programs that automatically open, manage, and close your trades based on predetermined technical rules.

To open the Strategy Tester on MetaTrader 4, use the keyboard combination “CTRL+R”, select the Expert Advisor you want to simulate (with the extension *.ex4), the currency pair, timeframe, and timespan. After you click on “Start”, MetaTrader will run the Expert Advisor on historic price data and simulate its results with the exact profits and losses that the EA would return.

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After the Strategy Tester is finished running the simulation, you can click on the “Results”, “Graph” or “Report” tab to analyse the results. The report will provide all important information you need to know about the simulated trading performance, including the gross profit or loss. This is shown in the following picture.

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In addition, the "Results" tab provides information about each trade taken, including the type (buy/sell), position size, Stop Loss and Take Profit levels.

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MetaTrader’s Strategy Tester can also be used to fine-tune your automated strategy by analysing the entry and exit points that the Expert Advisor took, and trying to adjust them to increase the profitability and success rate.

Why you should paper trade your strategy

Another effective way to simulate Forex trading and get the most out of it, is to paper trade your strategy. As its name suggests, paper trading involves opening and closing trades on a sheet of paper, using historic price data from the chart. You can use MetaTrader 4 to scroll the chart and move it bar by bar to the right with “F12”, and take the simulated trades on a paper with entry points, Stop Loss levels, Take Profit levels, position sizes, and the reasons why you took that trade.

Your paper trades should consist of at least the following information:

  1. Currency pair and timeframe for managing the trade
  2. Entry price
  3. Exit levels (Stop Loss and Take Profit)
  4. Position size, if you want to analyse your risk management performance
  5. Result of the trade: is it a winner or loser?


Paper trading is still a great way to practice your trading, even in the era of computers. You’ll have a nice overview of all trades and their performance on the paper, and will be able to analyse them even if you are not in front of your computer. Still, be aware that paper trading doesn’t account for liquidity, slippage, and the price, and most of the time doesn’t take into account spreads. To get a more precise picture of your trading performance, make sure to calculate the spreads and fees into your entry and exit points.

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Make sure to make regular retrospectives of all paper trades so you can identify any trading mistakes you made along the way and try to avoid them in the future. You can also choose to use an online Forex simulator only for the charts, and take the trades on a simple sheet of paper.

Conclusion

Simulated Forex trading is an effective way to practice and increase your trading performance in a risk-free environment. It helps you gain experience, practice trading, and familiarise yourself with the trading platform.

One of the best free Forex simulators is the MetaTrader 4 trading platform, which offers a number of tools to simulate your trading in a few simple steps. It’s one of the best free Forex trading simulation platforms, which allows you to simulate both manual and automated trading.

Don’t forget to use Stop Loss orders on all trades you make, even on demo accounts. This helps you to get used to Stop Losses once you switch to a real trading account.

Besides free Forex simulators, you can also paper trade your strategy using a simple piece of paper. Paper trading allows you to have a complete overview of all the trades you've made even if you’re not in at your computer, and helps you get into the habit of keeping a trading journal once you start trading with a real account.

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