Demo accounts are a great way to learn about trading. Beginners should start trading on a demo account to get familiar with their trading platform, different market orders, and market dynamics.
Semi-experienced traders, however, are likely to do better with a micro account since demo trading does not provide an accurate representation of real trading. You can open a micro account for as little as $100.
The purpose of this article is to explain what a demo account is, how it can help you, and when you should switch to a real account.
How does a Demo Account work?
Demo accounts offer a realistic livetrading.com environment without risking real money. With a demo account, you’ll receive virtual money which you can use to trade, practice your trading skills, learn about the broker’s platform, and experience the dynamic world of financial markets for the first time.
To get used to the different types of market orders, timeframes, the impact of news on exchange rates, and the functionalities of your trading platform, it’s recommended that you start with a demo account first. Nowadays, almost all brokers offer demo accounts that allow traders to learn Forex trading without risking any money.
With demo accounts, you can explore the Forex market without having to worry about losing real money. They usually come with $10,000 or $100,000 of virtual money. This is also one of the main disadvantages of demo accounts, since traders do not have an emotional attachment to their demo accounts.
Demo accounts resemble real trading environments to a large extent, but there are still some subtle differences to be aware of.
● There are no re-quotes or slippages. Demo accounts do not have access to the real interbank market, so you won’t experience lags or requotes when placing trades. Real trading accounts often re-quote, but demo accounts almost never do. In fast-moving markets, if your broker can’t execute your order at the specified price, they will re-quote it and ask you to confirm it. Slippages refer to the difference between the execution price and the price specified in your market order. Your order will usually be executed at a less favorable price if slippage occurs in the market. Because re-quotes and slippage depend on your broker’s ability to execute your trade on the interbank market, they often happen on real trading accounts, but not on demo accounts.
● Spread differences. Although demo accounts are designed to follow exchange rates available on real accounts, sometimes they fail to do so. There can be quite a difference between a demo account and a real account when it comes to price feeds, including bids and asks. As opposed to real trading accounts, where spreads fluctuate depending on the interaction between buyers and sellers, demo accounts tend to have fixed spreads. Spreads may widen during high volatility periods, such as after an important news release, causing your trading costs to increase.
Demo trading’s psychological effects
Aside from the differences in order execution and price-feeds, demo accounts also have a psychological effect on traders since they do not risk real money. When trading on real accounts, it is quite difficult to observe emotions.
Real accounts often trigger emotions such as fear and greed, which are not present on demo accounts. Overtrading is also a common practice among demo traders. Overtrading on a demo account carries no risk, but on a real account, it can be quite dangerous.
● Emotions are not involved. The norm for demo trading is to trade with virtual money traders money, there’s no real emotional commitment. Imagine a trade that is well in profit only to reverse soon after and hit your stop-loss level. A trader who trades on a real account will likely try to close the trade in profit or at breakeven. If the trade is losing, a real trader could act based on fear and hope that the market will again reverse in his favour. Emotional control plays an important role in successful trading. However, a demo account is not able to mirror those emotions which is why traders on demo accounts often make different trading decisions than traders on real accounts. There are many traders who manage to make a profit while demo trading, but start losing money once they switch to a live account.
● Demo accounts offer a risk-free trading environment. Getting familiar with the basics of financial markets is great, but it can be an obstacle for semi-experienced traders who wish to sharpen their skills. The human mind naturally considers the consequences of specific actions. Without real consequences, people become reckless and stop learning. This is what can happen when you trade on a demo account for too long. A lack of consequences can negatively affect your trading decisions.
● Traders on demo accounts often overtrade. A trader who overtrades takes too much risk and trades very large position sizes that aren’t within his or her risk management plan.
What’s the point of strict risk management rules if there are no consequences in demo trading? Unlike real trading, demo accounts are completely risk-free and provide an distorted view of the market.
Demo trading has many benefits
Demo accounts, despite their disadvantages, are still the best way to get started with trading.
Before switching to a real trading account, beginners should always trade on a demo account first. Even a professional trader may find demo accounts beneficial to manually back-test a new trading strategy.
● Trading: Getting Started. Demo accounts are the easiest way to start trading. If you have never seen a price chart, don’t know what timeframes are, or how to place a market order with stop-loss and take-profit levels, then you should open a demo account. They provide a risk-free environment to get a feeling of market dynamics. How do markets react when they reach important support and resistance levels? How to draw Fibonacci levels? How does an uptrend look like on a shorter-term chart? A demo account can help you grasp the basics of trading.
● Learn about the trading platform. Demo accounts also allow you to become familiar with your trading platform. Your trading platform is a vital tool for placing, modifying, and closing trades and analysing the market as a trader. In addition, if you’ve never traded before, you can get used to your platform by using a demo account so that when you start trading with real money, you don’t have to look around.
● Understanding the different types of orders. The Forex market has different kinds of orders. A market order executes a trade at the current market rate, while a pending order opens a trade as soon as certain conditions are met. Experiment with different order types on a demo account to learn how they work, such as buy stops, sell stops, buy limits, sell limits, OCO and trailing stops.
● The process of back-testing a trading system. Demo accounts can be used by experienced traders to back-test new trading systems before implementing them on their real accounts. You can do that with demo accounts without risking any money. You can either back-test a trading strategy manually or use MetaTrader’s built-in Strategy Tester if your broker uses it.
Using MetaTrader, you can manually back-test a strategy or paper trade the market using past price data by opening a chart and scrolling backward. As you press the F12 key on your keyboard, the chart will move one bar to the left.
Demo accounts should not be used for too long!
As a result, it ison a real account, and the absence of any real As a result, it is harder to understand the importance of sound risk management. A common mistake of beginners in the market is to stay too long on a demo account.
Because of this, you shouldn’t trade demo for a long time. Once you have a feel for the market and have mastered your trading platform, it’s time to open a real account and start risking real money. Learning can take anywhere between a few weeks and a few months, depending on your learning curve.
With demo accounts, traders can trade with virtual money without taking any risks. Forex beginners should always start with a demo account to get acquainted with their trading platform and the basics of trading. Demo accounts, however, do not suffer from the same execution lags as real accounts. In demo accounts, there are no re-quotes or slippages, but in real accounts they are common.
Furthermore, demo accounts don’t involve the same emotional commitment and don’t have negative consequences when a trade goes wrong. Demo accounts are inferior to real accounts when it comes to practicing emotional control and developing sound risk management methods. Open a real micro account with a small deposit if you’re already a demo trader. Observe your emotions when a trade becomes a winner or loser and always risk a small amount of your trading account on every trade.
It isn’t about making money when you’re just getting started with trading. It’s about forming healthy trading habits with strong risk management rules. In addition, only deposit money that you can afford to lose when opening a real account.