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Why You Should Blowup a DEMO Trading Account

Written by Pip Wrangler | Leave a Comment
Topics: Money Management

Blowing up a trading account can be beneficial if you learn from it. The reason we suggest to blow up a DEMO account-never a live account-is to learn Money Management skills. Looking for the way the platform handles the free margin and free margin percentage is the key.

By knowing how the free margin moves up and down as trades are placed and closed is very important. The platform will close trades when the free margin percent goes below 50%. Many good traders keep there free margin percent above 1000%. Some trades are made using a small percent of your account like 1%, 3%, or 5% of the account. At other times just keeping the free margin percent above 1000% is enough. The way that is done is when there are several trades going very positive then the percentage gets larger so additional trades can be added and not affect the account negatively.

The following is an example of a blow up account we placed and just let it run.

It can be seen that each of the trades was closed at a loss. This was done by the platform. All of the trades were closed when the platform reached 50% or less of free margin. When one trade was closed then the percentage went above 50% and continued on down again going below 50% to have another trade closed. Take a look at the times below when the trades were closed.

This could have been prevented by doing 3 things:

1. Not over trading the account.

2. By using stop losses.

3. Trading in the direction of the trend.

So if you want to learn some money management, do this assignment: Blow up an account and study what the affects to the account are. Then think of what could have been done differently to prevent being margined out.

March 10th, 2008
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