Pros and Cons of Demo Trading in Forex

A Forex demo account is a training account that is perfectly suitable for practising and getting ready for trading with real money. You can use your demo account free of charge to boost your trading skills, refine on your trading strategies or test Experts-Advisers under real market conditions. Money put on a demo account is a virtual investment. Demo accounts can be opened in less than 1 minute. Master the MetaTrader platforms or other tailor-made web-based platforms your forex Broker offers and acquire trading experience on a demo account with no risk of losing any of your money.

Demo accounts allow beginners to train under real market conditions

Every forex broker offering demo accounts advertises them as if they were gifts of free money. Their offers of $50,000 or $100,000 to trade are intended as enticements to sign up, with an inference that you won a contest or lottery. Rare that anyone turns down “free,” so erstwhile traders as well as the merely curious, jump in with both feet.  Clever of those brokers!

Despite the tactics of some forex brokers, demo accounts are very useful. For one thing, they give novice traders a relatively painless introduction to forex. Second, they can help seasoned traders devise new strategies, test old theories, as well divert some of their pent up trading energy, perhaps while waiting on the sidelines for trade setups in their live accounts. Indeed, many traders, particularly intra-day traders, will trade a demo account in conjunction with their live accounts. The idea is similar to military training that simulates combat conditions.  Professional soldiers train constantly, even if they have years of combat experience.  Sharpen the skills, as well as learn new ones, with less risk. 

Some brokers have eliminated the 30 day trial period on demo accounts. They know that traders-even those with live accounts-continue to trade demos, some intent on learning what it’s like trading with larger capital. It’s also a good selling tool for brokers, as traders will often try a variety of platforms and brokers until they find one or two, that fits them best. 

While demo accounts can be useful, there are some aspects that traders should consider: 

The Pros of demo trading: 

  • Demo accounts are risk free. You get to play with Monopoly money! This is both a positive and a negative. You may not risk real money, but you risk becoming too used to-addicted is not too strong a word-demo trading. The difference between somewhat relaxed demo conditions, and white knuckle, blood pressure spiking live trading, cannot be over stated. Nonetheless, demos don’t require use of your own capital, and unlike equites brokers, most forex brokers are not very pushy with sales followup emails or other solicitations.
  • A great way to vet trading strategies Wise experienced traders and novices alike will generally want to test the success of any fresh trading strategy they come up with before implementing it in live trading environment. This allows them to accustom themselves to following the system and to work out any bugs in it that might become apparent while using it as real exchange rate movements occur.
  • Excellent for learning trading, charts and platforms. The learning never stops for a trader. Demo accounts-particularly with a variety of platforms and brokers-can expose  traders to different types of charts, software, and even indicators. Though some demo accounts seem to be faster than live accounts, likely due to different servers for demo and live accounts as well as bid/ask processing, they cover the basic parts fairly well.  
  • Learn to Manage Your Emotions When TradingOne of the most challenging aspects of trading for many people involves learning how to manage their emotional responses to winning and losing trades in such a way that it encourages overall profitability. Coping appropriately with otherwise normal psychological responses to making and losing money — such as fear, greed and hope — can often distinguish the successful forex trader from the loser.
  • See if You Like Trading Currencies. Those new to trading currencies or trading in general can use a forex demo account to see if they are mentally and emotionally suited to the rigors of trading forex. Everyone is different, and some folks might really enjoy trading currencies, while the activity may not suit others’ tastes, personalities or lifestyles at all.
  • Practice Good Money Management Techniques. One of the secrets to enjoying long term success when trading forex involves learning to implement well established money management principles. A demo account allows a new or experienced trader to practice such techniques thoroughly on real exchange rate movements and see for themselves how the typical benefits accrue to their demo account in virtual money profits.
  • Test a New Trading Strategy Without Risking Real Funds. Wise experienced traders and novices alike will generally want to test the success of any fresh trading strategy they come up with before implementing it in live trading environment. This allows them to accustom themselves to following the system and to work out any bugs in it that might become apparent while using it as real exchange rate movements occur.
  • Try Out a New Broker’s Trading Platform. Unless you are using the MetaTrader platform that a lot of online forex brokers support, you will probably want to use a demo account to see whether a new forex broker’s proprietary web or client based trading platform is suitable for your trading needs.
  • Check Selected Broker’s Features and Services. Forex brokers eager to have you open a live trading account with them will often give demo traders access to their special client features, educational and news services, and customer support departments. This can be a great way to check out the quality of the broker’s overall services before committing any real trading funds to make sure that they are the sort of trading partner you will want holding your account.

Few of the Cons of practice demo account: 

  • Demo accounts are not real. Training with live ammo may give army commandos a feel of the real deal, but demo trading cannot when compared to live trading. With the commandos, there is risk of injury or death, and that’s a crucial difference. Traders tend to be more relaxed while trading demo. While this is good and should be emulated trading live accounts, demo trading often gives a false sense of confidence. Sometimes, traders whom trade quite well in demo accounts, are unable to repeat that success with live accounts. 
  • Bad trading habits can result. Everyone whom has ever traded anything has taken a leap of faith once or twice, and gotten away unscathed.  This is one of the biggest drawbacks about demo trading. Without real money at stake, many will gamble more than trade. When they finally open live trading accounts, they lose money since they have acquired poor or incomplete trading habits. Anecdotal information suggest that demo trading reinforces poor money management. This is especially true of those that scalp. 
  • Different Spreads / Execution. One final drawback is that you may well find that your orders are filled instantly on a demo account, but when you eventually start using a live trading account, the spreads will be larger at busy periods of the day, and the execution of your orders may be a little slower.
  • Order Slippage May Not Occur as Often. In order to make their demo trading experience as attractive as possible to potential clients, online forex brokers might largely or even entirely eliminate order slippage from their system. Thus, if a stop loss is triggered in a demo account, it might be filled at the same price it was entered at, while if a stop loss was triggered in a real account at the same time and level, it might have actually been filled at a considerably worse rate depending on actual market conditions.
  • Order Execution Times May be Faster. Since demo account trading does not actually result in real transactions being entered into the market that can have profit or loss implications for the market maker or broker, the actual execution rate does not matter like it would with a real transaction. This can result in faster execution times observed when trading in demo accounts, while execution times seen for real account trading can depend on market conditions and may involve one or more re-quotes in fast markets.

Opening Up a Free Forex Demo Account

Just about any reputable forex broker will allow prospective and current clients to open up a demo account with them free of charge to allow traders to practice forex trading using virtual money.

Demo account traders often also get access to at least some of the broker’s client services and customer support staff so that they can get a better sense for what dealing with the broker will be like when they decide to fund a trading account with real money.

Final Thoughts

Trading with a real account enables you to clearly see that it is essential to have discipline in order to manage risk. On a demo account, discipline seems unnecessary and the placement of stop losses is often seen as something that prevents you from making profits. A trader using a real account is aware that these two aspects are equally important, if not more, than a strategy that shows entry and exit points.

However, even if demo accounts don’t enable you to develop the psychological aspect of trading, they are essential to learn trading, how trading software works and how to develop strategies for free and without financial risk.

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