What is a demo trading account?
A demo account is simply a practice account that allows investors to trade on the foreign exchange market using “paper credits” rather than real money. Demo accounts have grown in popularity in recent years as people have become more interested in Forex trading as a form of financial investment. To comprehend the significance of trading on a Forex sample account, it is important to analyze the emergence of this phenomena.
The importance of creating a practice trading demo account
Most beginners lose money at the start of their trading journey.
Heck, even I lost about 60% of my account at the beginning.
It’s not fun to lose money, and obviously you won’t see many that will admit of losing their money. People like to brag about success and to keep their losses to themselves.
As the saying – A success has many parents, but a failure is always orphaned.
Trading is NOT intuition-guided
You might have an intuition about an asset, buy it and it will rise in price. Then, psychological speaking – you will assume you have an incredible talent in picking up opportunities in the financial markets.
This is the worse that can happen. For 2 main reasons:
- Statistically you will guess right on about 50% of the times. Meaning it’s like you gamble on “heads” when flipping a coin, and it does land on “heads”. You will not think that you have an ability to forecast how the next flip of coin will land, right? Yet many will assume they can when it’s trading related. Only difference – in trading you lose much more.
- Even if you got the direction right – when will you close the position and monetize the your profit? Once again, intuition is your worse enemy. Imagine the price keeps going up, and you say to yourself “I’ll know when to exit the position. Once the price stops from rising.” And it’s a good idea, on theory only. Because you know when the price stops only in hindsight. Never on real time. Never. You’ll understand more about this matter once you start trading.
The advantages of utilizing a demo account are as follows:
1. It enables you to learn how to use the platform and get a sense of the broker’s trading circumstances.
The demo account is essential for learning how to make orders, set various types of charts for technical analysis, determine contract sizes and margins based on leverage, and so on.
2. You may use it to create trading strategies.
MetaTrader 4 is the most popular trading platform among retail traders. Live quotations from all markets are available in the demo mode, as well as a virtual portfolio to practice under real market circumstances. As a result, you may learn to analyze price movement, chart figures, support/resistance lines, currency pair correlations, and how volatility varies based on market hours and asset types, and build your own trading methods. You may also use past data to test automated methods and fine-tune your settings.
The disadvantages of utilizing a demo account include:
1. You will not acquire the healthy fear that is required for trading success.
Even if you were able to make money on a demo account, this does not guarantee that you will be a successful trader. Emotions connected to losses and even winnings have relatively little impact on your actions in a controlled setting where losses mean nothing. As a result, you’ll need real-world experience to comprehend and handle the psychological aspects of trading. Because you could lose everything, your first genuine account should be created with a very little quantity of money. It’s the price you pay for complete instruction.
2. You can get complacent or form harmful habits.
Demo accounts might give you a false sense of security. A demo account makes it difficult for traders to appropriately manage risk. They also take greater chances with virtual money than they would with actual money, which can lead to poor trading habits.
3. You won’t be able to see how you’ll act in real life unless you put real money on the line.
Reduce your losses as soon as possible and let your winnings run! This is true in theory, but it is frequently difficult to put into reality with an actual account. The most difficult aspect of trading is understanding when to exit rather than finding effective entry positions. When the psychological component comes into play, it’s extremely easy to accept gains, but it’s a different story when it comes to taking losses (which might turn into profits).
What are the differences between the demo and real accounts?
There are many differences. When you’re paper trading you don’t really pay attention to:
- Money management, and because it’s not real money, its ignored.
- Margins required to take positions which differ from position to position. This can affect money management.
- Risk management is also different. Risk management is not punctilious, not precise.
- Mark to market losses can make your portfolio looks bumpy, lopsided, and generally bad. In real-world trading, this is the first thing that is observed and it affects the total NAV of the portfolio. When you are trading with a demo account as the simulator, it doesn’t matter because you’re looking at the end result only.
- Stop losses are based on the past. Usually, stop losses are triggered because the order book is exposed to institutions and large traders and they get full access.
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.
Demo Accounts Help With Execution
In most cases, demo accounts will fill a market order at the price displayed on the screen. Slippage can occur when an order is placed in the live market. As a result, market orders are frequently not completed at the predicted price—or, in the case of big orders, at least a portion of the position is purchased at a different price than expected.
Demo Accounts Frequently Provide Substantial Capital
Generally, demo software allows the trader to select the amount of funds they want to use to practice trading. The sums vary, but they are frequently substantial (and beyond the actual capital the trader has for trading their own account).
Simulated trading with a larger amount of money than is really transacted might present a trader with an unrealistic safety net. Small losses can be recouped more readily with greater capital—a loss on a smaller account is more difficult to recoup.
What is the biggest problem of demo 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.
It’s not perfect, but it is a necessary
Trading with a real account allows you to learn firsthand how important discipline is for risk management. On a demo account, discipline appears to be unneeded, and the use of stop losses is frequently regarded as a barrier to success. A real-money trader understands that these two characteristics are just as essential, if not more, than a method that indicates entry and exit locations.
Demo accounts, however, are necessary to understand trading, how trading software works, and how to build methods for free and without financial risk, even if they do not allow you to develop the psychological component of trading.