In practice - often because of the lack of a real money commitment - results achieved from trading in a demo account can differ considerably from actual live trading results. Even if a person performs extremely well trading a demo account, their results in a live account often differ considerably. In general, this phenomenon tends to arise because when your own funds are at risk, a different trading mindset often ensues than when trading with virtual money.
This potentially significant difference factor needs to be taken into account by a trader when assessing the value of a particular trading strategy or the services of a forex broker they are testing.
The primary reasons that such differences can be observed between live and demo account trading tend to fall into two main categories: execution related and trader related. Each of these categories will be discussed in greater detail in the sections below.
The following potential causes for performance differences observed between live and demo account trading can be attributed to execution issues:
The following potential causes for performance differences observed between live and demo account trading can be attributed to trader issues:
Trading virtual money removes the psychological element from trading, so for this reason, it cannot accurately assess a person's trading abilities. Nevertheless, virtual trading can have great benefits when testing the performance of a trade plan and also for trader education purposes.
When used as an educational tool, a forex demo account gives novices a risk-free start to trading in the forex market. In addition, strategies can be put to the test without assuming any risk, all in real time trading situations.
Overall, trading in a demo account offers a great service to novices that would otherwise have to learn using, and probably losing, real money. While the emotional rush of risking real money while trading may be lacking in demo trading, trading a demo account allows you to learn to watch the market closely and can help you get a better feel for how the forex market operates without putting any real cash on the line.
To get around some of the aforementioned causes of performance differences between live and demo account, some traders have chosen to open micro or mini accounts with a forex broker, using a small amount of funds rather than funding their entire trading account right away.
This strategy allows them to test out the forex broker or trading strategies in a live trading environment, while not putting their primary account funds at risk of loss.
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