A Forex trading demo account is an account type that allows you to trade in a virtual market. With a demo account, you can get a taste of the real Forex market, but use virtual funds and earn virtual profits.
Demo accounts are usually used by beginners who are not yet confident in their trading skills and wish to learn the basics without risking their hard-earned funds. Moreover, experienced traders can use demo accounts to test out new trading strategies or utilize different tools and features of the trading platform.
In this guide, we will explore the difference between the live and the demo account and address how you can benefit from using the latter. Moreover, we will discuss the main advantages and disadvantages of using the demo account, and provide you with some advice on when it is best to move on to real trading.
Live account, demo trading account, and trading simulator – what’s the difference?
As a beginner, you might find the new terminology that you come across a bit confusing, so here is the breakdown of the main differences between the live account, demo account, and the Forex simulator:
- A live account is an account used for actual trading: making actual deposits, opening real trades, generating real profit, or experiencing real financial losses. This type of account means that the risks associated with it will involve the real funds that you invest, which is why some beginners are often wary of opening one straight away. Moreover, in order to set up a live account, you will be required to provide some sort of identification document, make a real deposit, and, possibly, fill in the form issued by your broker.
- A trading simulator is a specific software that mimics real trading without putting your real funds at risk. It can come in a form of a trading simulator platform that is dedicated purely to the simulation practice, or a trading game, that may vary depending on the game developer. Trading simulators often use data from the real market to provide their users with a realistic market experience.
- The demo account for Forex trading is often quite similar to the live account. With it, you can, too, choose your preferred trading instrument, determine the preferred size of your position, and start trading at the market. The main difference is that you will not have to deposit your actual money, and will use the virtual funds instead. It is unlikely that you will have to undergo a multi-staged procedure to open a demo account. Instead, you will probably be asked to provide the broker with some basic details such as full name, date of birth, and email address.
What are the advantages and disadvantages of using a demo account?
Before we dive deep into discussing the main pros and cons of using the demo account, let us determine who can utilize it best. The most obvious answer to that is the beginners, and here is why.
According to the professional traders, going straight into real trading without having enough knowledge and experience is making the entire process even riskier than it already is. Thus, a trading demo account is considered a good initial stage for amateur traders to polish their trading skills before entering the actual market. On top of that, a demo account can be used by experienced traders who wish to test out new strategies or different trading tools.
As useful as it may seem, a demo account may not be suitable for everyone. In order to help you decide whether or not you should sign up with one, we have created a breakdown of its main advantages and disadvantages.
- With a demo account, you can determine which of the trading instruments you prefer. When you are not under the stress of trading with your own, hard-earned funds, you can take your time to research the specifics of each individual asset, and try trading it to decide whether or not you wish to incorporate it into your trading profile.
- Using a Forex demo account is a good way to learn some of the basic trading skills and avoid common mistakes, such as opening a trade by accident.
- Another important skill that you can learn by practicing with a demo account first is the best timing to initiate trading. Such skill will be especially important to those aspiring to become day traders, as with a demo account you can monitor how the prices change over different periods of time when the asset is most prone to market volatility, and when it is most profitable to trade it.
- Working out a trading strategy that works best for you is not an easy task, and for many, it is easier done when the actual money is not put at risk. With a demo account, you can test out the strategies that you are interested in and single out the one that demonstrates the results that you seek.
- Finally, with a Forex broker demo account you can explore various tools and features of the trading platform that you sign up with. From the tools for technical analysis to automated trading, you will be able to choose what you like and wish to incorporate into the real trading sessions in the future.
- No matter how good or realistic the demo account is, it cannot become a full substitute for the experience that you gain via the actual trading. There are many factors that it simply cannot account for, such as the emotional state that you may only experience while trading with real money. This factor is especially prominent since many traders tend to be much more reckless with virtual money, as opposed to the actual trading funds.
- Moreover, you should bear in mind that the real market is much more complex, and the strategy that has shown great results in a demo version, might not perform as well in the real market conditions.
Tips on how to use Forex demo account
Sometimes, traders that sign up with a demo account treat it as a game, and while this approach may be a lot of fun, it can hardly be regarded as a learning process that can, consequently, be useful in your future trading career. Below, we have compiled some basic tips on how to make the most out of your demo trading account.
Use your demo account to understand the trading platform
It is often advised that you use a demo account of the same trading platform that you intend to use in future trading. Most of the trading software available on the market is quite user-friendly, and there will probably be some educational material on how to use it that you, as a trader, can access. However, sometimes one can appreciate a practical test-run of the specific tools and features that the platform has to offer.
A solid characteristic of the best Forex demo account is full access to the platform’s features, such as one-click trading and charting. Being able to explore the platform also means that you can decide whether your overall experience was positive enough to continue trading with this specific software.
Treat your demo account as if it was real
As mentioned earlier, one factor that can be deciding in real trading and is usually absent in trading with a demo account is your emotional state. It has been noted by many experts that traders, especially beginners, are much more likely to take up risks and spend a lot of money while using a demo account.
Since such behavior is unlikely in real trading, we recommend that in order to benefit from your demo account fully, you trade as if you were using real trading funds. Moreover, it might be a good idea to find a demo account with flexible deposit options, as large deposits, such as 10,000 or even 50,000 EUR is unlikely in an actual live account.
Account for slippages
Order execution in a demo vs live account is much more smooth. In reality, slippage may occur, which means that your order cannot proceed at the desired price, and the next available price will be used.
In order to make trading with a demo account as realistic as possible, we recommend that you assume at least a 1% slippage on market orders for high volume trades. Moreover, you should probably assume larger slippages with a lower volume or with more volatile assets.
Do not underestimate the importance of research
If you treat the virtual funds of your demo account as you would treat the real money you will probably want to avoid devastating financial losses. Thus, much like with actual trading, it is recommended that you take your time to understand your preferred trading asset better.
A good demo account will offer you access to the charts and graphs that will show you the historical value of the trading asset in-depth, and you can then use this knowledge during the real trading sessions.
Make realistic assumptions with Forex free demo account
As mentioned earlier, when it comes to the real trading experience, the demo account does not always fully deliver. For example, when a bid or an offer is placed, and either one of them is one tick or one cent low or high of the move, the demo account might show that the order was filled.
With the actual market, this might not always be the case, which means that you should probably remove profits or losses of such trades from the net profit/loss as if such trade never existed. Moreover, it is recommended that you only assume that the bid or offer is filled if the price trades through the bid or offer by a cent more, at the very least.
When should you move on from the demo account to the real one?
A demo account can, indeed, be used as a good opportunity t build up your confidence in trading. However, at some point you will probably want to transition from the practice runs into real trading for profit. So how does one know what is the right time to let go of the Forex trading demo for beginners?
This is not an easy question to answer, especially since a lot of beginners sometimes tend to use demo accounts for much longer than needed. This may happen because trading with real money can be quite stressful, and virtual funds of the demo account can offer the same thrill but with no financial risks involved.
If you realize that this is what is happening to you, you should ask yourself – what is it that you are seeking from Forex trading? Is the entire process interesting simply because it is exciting to learn more about the market, and the intricacies of trading, or would you like it to be a form of financial investment? If it is the latter, we recommend that you move on to real trading once you feel that you have acquired enough understanding and practice to trade confidentially.
One other factor, that you should probably keep in mind is what exactly it is that you wish to gain when you open a Forex demo account. One way of approaching your demo account, which is often recommended by professional traders, is to set certain goals to achieve. Once you are able to tick all of the set goals off, it is probably time to move on to the real account.
Finally, a demo account can be used as a tool for setting the right mindset. One major component that can sometimes prevent a trader from seizing the right opportunity is the fear of failure. While using a demo account you can learn to act bravely where possible. However, you should also keep in mind that what might feel easy with the virtual funds of the demo account, may be much harder to execute when the real money is at stake.
Final thoughts on Forex demo accounts
There are two main types of accounts in Forex trading – live and demo accounts. A live account is used for the actual trading with actual funds, while the demo account for beginners is mostly used to practice one’s trading skills and build a general understanding of the Forex market.
A demo account can become a good tool for acquiring useful skills and knowledge that can later be used during real trading sessions. In order to make the most out of your demo account, you should treat your virtual funds as if they were the real money that you have invested and plan your trading strategy accordingly. Moreover, you should keep in mind that the demo account, no matter how good it is, cannot be a full substitute for the real trading experience.