There are many reasons that traders should start their trading journey on a demo account under the supervision of a reputable broker. Trading options in Asia is no different, and before you begin to trade options online, here are some key reasons why using a demo account is essential.
One of the biggest mistakes new traders make is entering positions without knowing their breakeven cost for entry. You can practise different scenarios by starting with a demo account before putting any capital at risk. This allows you to test if the probability of profit/loss (P/L) or Reward vs Risk (R/R) justifies the position size entered.
Without first understanding how to trade options, you are at a disadvantage against experienced traders. A demo account provides an opportunity to test your different strategies with virtual money before using real cash. It helps you learn the mechanics of trading and helps iron out any kinks, so your money is not wasted.
During practice trades on a demo account, you can fine-tune your stop-loss points for each trade to improve your overall P/L ratio. This means that rather than cutting losses too early, you ensure that each trade has sufficient room for profit according to its level of volatility or premium value. With this skill under wraps, there will be fewer instances where you incur substantial losses in your real account.
Contrary to what some may believe, options are just another financial instrument with no place for greed. The reason is that when you buy an option, there is always someone on the other side selling it to you – so when the price in all likelihoods and possible outcomes, your trade needs to be structured with sufficient risk protection in mind.
A demo account helps you map out your strategy for adding or maintaining existing position sizing until expiration. Through practice and experience, you will better understand what works best according to different market conditions.
Options are a wasting asset that loses value with time. The two components that contribute to this is intrinsic value and time decay. You can calculate the Intrinsic Value for any options contract at a point in time by subtracting out the premium from its total price tag, which means it is only relevant when the option expires.
However, this does not tell you how much an options worth will decline per day if nothing happens. This rate of decline is known as Time Decay, which exponentially decreases the value of an option over time once it has been opened. If you want to stay ahead of these movements, practise on a demo account before putting real money into action.
Time decay or theta is a critical component determining whether an option will be in the money when expiration nears. It is one of 3 components that impact premium value and affects any position you hold, much more so if it involves multiple transactions. This is because each transaction you enter influences where your breakeven point lies, so accurate timing of entry and exit points are crucial to limit losses. That said, a demo account helps you learn how time decay works for options, so your trades become more precise and, therefore, beneficial.
When using a demo account under supervision, you get to enjoy these benefits without even risking any real cash. We recommend using an online broker with an excellent track record like Saxo Bank before trading options in singapore.