Some beginners in forex trading avoid using demo accounts. Maybe they are right, maybe wrong. Read to the end and find the answer.
By Guy Avtalyon
Demo and real account, what to choose? That is the question now! Before you start trading with real money, it’s always smart to open a free demo account to experience what trading Forex may be like. There you can practice your skills, learn, follow experienced traders. Well, demo trading isn’t live trading, and ti will never show you how to react but it is a valuable tool and useful to learn how all things work.
You can learn how to survive the ups and downs of trading financial markets if you use the demo account. As I said, the problem is that demo accounts don’t always reproduce reality.
Demo accounts are generally offered with the best possible terms and fees but those conditions are out of reach for most of us. And demo trades execute free of latency and other handicaps that we have to deal with when using real accounts.
What are the differences between the demo and real accounts?
Every trader can notice the difference in a short time.
On real account, you don’t have that magical help and nothing will help you to make money in some easy way.
A demo account is a live simulation. So it mimics live prices very closely. They do have a slight difference at some points in price as well.
Paper trading executes one goal, to teach you to learn how to properly execute trades as they say and test strategies without risking real money. Paper trade is advisable until you learn enough to execute trades without making mistakes. These mistakes will cost you money and you have to learn how to avoid them. The lack of a demo account is that paper trading does not develop your trading mindset because there is no real money at risk.
For whom are a demo account and real accounts better?
A demo account is always recommended for beginning traders.
Trading on a demo account is not only vital to consolidate the right knowledge and strategy. It can give important knowledge about how to react and avoid emotional reactions. After you’ve tested your trading strategy for a few months with “paper money” and it is now showing steady and promising returns, maybe it’s time to move to a real money account.
This transfer might seem easy and just an administrative step. But actually, it can be one of the most challenging periods you’ll meet as a trader. The moment you switch to the real account is also dependent on which type of user you belong to.
Two types of users of the demo account are recognizable.
One who never takes the demo trading account seriously.
It’s just a game, simulation of the possible real situation for this kind of trader. That kind of user becomes childish with their accounts. Placing crazy trades and not really caring about it because there is so much money in the demo account. They are masters of the game in their minds.
This is the worst type. From the beginning, you should look to stay away from these kinds of actions. This always limits your growth the trader gets. Such traders don’t spend time trading their plans or gaining wisdom from the demo trading account.
The other type is represented by traders that take the demo account too seriously is different. However, there are drawbacks to this as well. Traders who are not successful in this group may leave the market.
You have to know that no one is able to hit the goal straight away and every day. In the beginning, you have to give yourself a growth period.
Trading with ‘‘paper money” allows the user to practice the mechanics of trading without the risk of losing real money and allows convenient testing of new and unproven trading strategies, spreads, fees, swap interest, instruments, and trade execution. All of this should all emulate those of real accounts that the broker offers. Demo account models an idealized trading environment. The execution of trade orders is simulated to show what would happen in a perfect case.
Contrary, real trading involves many dynamic variables that are impossible for a simulation to properly model like are supply and demand constraints, order processing and information transfer limitations as well as imperfections in the various technologies and some of these are beyond the broker’s control. On the most demo platforms, the trader is likely to achieve a level of performance that would not be reachable on a live trading platform.
What is the first problem in real trading?
The first problem in real trading is that of latency or slippage. You have to understand, there is no electronic trading system that is perfect. There will always be time lags between receiving an order and the platform being able to fill it. These time differences can be small, but they may create discrepancies in trading performance, especially when markets are moving quickly.
Demo accounts don’t interact with the market and it is impossible for them to model supply and demand properly. It means that if other orders are ahead of yours in the order row, you may not achieve the entry price you want. This happens because the offers displayed at the time you entered the order have already been matched with other buyers or sellers.
With some trading models, this triggers a request and you have to reenter the order. This means, your entry price can be significantly different than when you first entered the order. Also, if you placed a stop/limit order to execute at a certain price level, the entire order may not be filled at one instant.
What is the biggest problem of demo and real accounts?
The simulations, in short.
The aspects of supply/demand cannot be simulated entirely because the order flow from the demo account itself would influence the market. It’s clear.
A demo platform publishes a quote at which to trade when in fact there is no market. It’s usually not a problem when trading major Forex pairs owing to the size of the market and because retail order sizes are usually relatively small. There are cases in some instruments where an order cannot be filled because there is “no market” at a given point in time. These are known as liquidity gaps and this can happen when the market is adjusting to an important breaking event. This causes the price to “gap” a certain distance.
In real trading, an order like this, would not be filled at the quoted price because the broker’s matching system would find that there was no price to take and complete the order.
In simulated trading, the order would be filled anyway, even when the price fell through a liquidity gap.
When choosing a demo account you should choose the one closest to the account you plan to trade with. It doesn’t make much sense to use a $100,000 demo account that trades standard lots when the one you plan to use will be a EUR 250 micro account.
But you can still use such a demo account.
But be aware, if you trade with big cash on your practice account, this can give you an unrealistic sense of your margin for error.
What is smarter to start forex trading with a demo or with a real account?
More popular nowadays is to bypass demo trading altogether and start with a real account with a very low balance. Some brokers allow trading with very low cash balances and you can adjust the trade sizes. One of the problems with using paper money is that traders have very little emotional connection with what they are doing.
So, there is no competitive element, and traders often lose interest. Using a demo account is good for traders who don’t want to place their own money at risk but want to develop their skills. A “real” account has the risk of losing your hard-earned money.
Protect your capital and trade smartly. The emotions of fear and greed will come into play when you trade real money and these emotions need to be understood and controlled.
You have to have trading rules in place to make sure you don’t let emotions destruct your trading.