2Bull Forex Blog

Most inexperienced traders are advised to begin trading using a demo account. While this may generally be a wise move, it’s not always a good idea to demo trade all the time. In this article, I will discuss the role of demo trading, and its implications for everyday retail traders like you and me.

What Is Demo Trading?

Also known as ‘paper trading’, demo trading is essentially trading without using real money. Typically, this involves signing up for an account which tracks how much a trader would have profited or lost if he or she had traded with real money.

Is Demo Trading Always Advisable?

Generally, demo trading is a great place for new traders to familiarize themselves with the trading platform of their broker of choice. I’ve made many silly mistakes when I was demo trading and I’m glad I didn’t have to pay for my mistakes with real money!

You definitely don’t want to enter into a long position when your intention is to enter short. Sounds unlikely? Believe me, there are more traders that have made this mistake then they would like to admit.

However, excessive paper trading is not a good idea. There is a tendency for conservative traders to remain in demo trading for too long. Eventually you’ll have to step out of your comfort zone and start trading with real money. There is only so much demo trading can do for the development of your trading psychology.

Why Not Stay In Demo Trading?

Essentially, paper trading has very little to do with real trading. Many inexperienced traders make the mistake of assuming that the two are very similar. In reality however, they are worlds apart.

Most people won’t feel the pinch of a losing trade, and thus won’t learn from the mistakes that come with it. A large part of trading is associated with learning from experience, and you can’t have a realistic trading experience when demo trading.

So What Should I Do?

Of course, it is equally inadvisable that you immediately deposit $10,000 and start trading standard lots… there is simply too much at risk for inexperienced traders!

A better idea would be to start trading with a mini or micro trading account, where the profit and loss potential is greatly reduced. This way, you can feel the emotional impact of winning and losing in your trades and learn in a more effective, yet safe way.

Many Forex traders like to use technical analysis to help them make trading decisions. In this article on technical analysis, I’ll discuss the uses of and implications of the double top/ double bottom chart pattern.

What Is A Double Top/ Double Bottom?

Double tops/bottoms are typically used as trend reversal signals. This is because this candlestick formation is often found at the end of a trend on the trading charts.

A double top pattern consists of two clearly defined peaks (i.e. tops) at approximately the same price level. In an uptrend, prices rise to a resistance level, and then decline to a support level, thus forming the first peak. Soon after, prices start rallying again and attempt to break the previous resistance level (at the first peak) before failing and retreating once again, forming the second peak. On the charts, a double top formation looks like an “M”. When traders see this occurring, they will typically enter into short orders.

The reverse is true for a double bottom candle pattern, but forming a “W” shape instead, as well as traders subsequently entering into long orders.

What If Prices Break Past The First Resistance Level?

After the first peak is formed and prices manage to strongly break through the resistance level on the second rally attempt, then the double top formation has failed. In this instance it is NOT advisable to enter into a short position.

The reverse is true for double bottoms.

What Is The Underlying Reasoning For Double Tops?

The first peak shows that prices are unable to break through a particular resistance level. However, there will usually still be buyers in the market who will attempt to push prices back up again. Once the market forms a second peak, it shows more evidence that the buyers are not strong enough to push prices further up, wearing them out and allowing the sellers to continue pushing prices further down.

The reverse is true for double bottoms.