If you have made a decision to start trading in the Forex market, you should remember that doing this without prior training is extremely reckless. At least any experience is necessary to get a good profit, and really profitable results are almost impossible to achieve without it. And therefore, we advise all beginner traders to use the virtual Forex demo account - a solution that allows you to work out a variety of trading strategies without risking your own funds.
So, for those who started trading recently, we recommend opening a demo account prior to trading with real money. A training demo account is a great way for novice traders to gain the necessary trading skills, learn the features of the foreign exchange market and get acquainted with trading platforms without thinking about potential risks, test a trading strategy or trading robots. When registering a demo account with most Forex brokers, you get access to all trading instruments and assets, and you will use the real MetaTrader trading terminal.
What is remarkable about the demo account. First of all, it is free, this means that a trader uses virtual money issued by a broker. In all other respects, it is no different from a real account, allowing you to perform various kinds of transactions based on current quotes using all the technical tools, only in the training mode.
However, this practice has distinct disadvantages. First, a trader must not estimate trading on a live account by trading on a demo account. These are two completely different worlds. Secondly, trading servers are constantly monitored by an experienced team of specialists ensuring the smooth operation of servers and trading software. Thirdly, there are different psychological components: you are trading virtual money, therefore, at a subconscious level, you don’t take this seriously enough, and Forex trading requires a conscious approach and deliberate actions. This does not mean that it is difficult to trade currencies, it is simply necessary to approach this responsibly. Human psychology factors can hamper trading real assets, which is why it is better to start with mini lots, small amounts, but on real money.
It should be noted that very experienced traders often use such accounts, first of all, to test new strategies without risking their own funds. In the event that the results of such tests turn out to be successful, the developed trading algorithm is applied with real funds.
Everything that can be achieved with the usage of a demo account can be divided into several main groups:
- Learning to work with a trading terminal. Using demo account, you can thoroughly familiarize yourself with all the intricacies of the trading software in practice, without fear of incurring losses from ill-considered actions due to your own inexperience.
- Testing technical skills. With the help of a demo account you can perfectly “train” yourself in everything regarding quick decision making. This ability is extremely important for traders, as it allows them to promptly and, at the same time, accurately open trading orders and close them, set Take-Profit and Stop-Loss levels, as well as perform many other important operations.
- Thorough introduction to the market. Thanks to demo account, you can study in detail not only the necessary software, but also all the features of the market. This circumstance allows you to accumulate market experience, which helps to make the most rational decisions based on the analysis of the situation.
- A complete test of the trading strategy’s effectiveness. Practice shows that even a very accurate and involving a lot of details algorithm can contain various kinds of errors, which are almost impossible to detect without testing. And therefore, it simply needs to be checked in practice - supporting your calculations with statistics. Thus, if your trading system allows you to check it on a demo account - be sure to do it.
Demo and live account: what are the differences?
As for the differences between virtual and real accounts, it is worth recognizing: there are quite a few of them:
- Trader attitude. Working with virtual money, you do not feel any fears for the final result. That is why mistakes are made much less often than when using real finance.
- The likelihood of delays, slippages, requotes and other unforeseen situations when using a real account.
- Frequent execution of orders on the so-called "garbage quotes", which are erroneous. When working with a real account, you will not be able to carry out transactions at such quotes, since they are not market ones.
- Connection aborted. If for one reason or another the Internet connection with the server is cut off, you are guaranteed to lose nothing if you trade on a demo account. The same cannot be said about working with a real account: interruptions in data transfer can directly affect the final result of trading.
Another important difference between demo accounts and real accounts is the speed of opening positions, or execution speed. On a training demo account, everything happens faster and always at the price you wanted, but in real life everything is somewhat different. There is a concept of the first market price. But this is a concept, the first market price does not have a clear definition or mathematical formula, moreover, it may differ in different companies. In the event of sharp price movements, a “gap” may form. This happens when the subsequent quote is very different from the previous one. In such a situation, the order on the demo account will be executed at the price indicated in it, and on the first market price - on the real one. There are practically no cases on a demo account when a trader receives a new price. In reality, this may be due to the fact that the computer, engaged in the quotation on the demo account, is configured to allow large deviations from the current price. And in a real account, dealers monitor strong price deviations in the request from the current market quotation, which does not mean that the dealer is working against you, as it may seem to beginners. This is generally accepted real practice in the financial markets.
Also, trading on a demo account has its advantages. Advantages include acquaintance with the trading terminal and the opportunity to study all broker’s trading conditions, try your hand as a trader in the financial market without the risk of monetary losses. But for these advantages you have to bear a significant difference from trading real funds. After trading on a demo account for a long time, you may encounter some difficulties when you start to trade with your own real money: it will be difficult for you to switch to real sales. Working on a demo account, you did not risk your own money, and understanding this can automatically switch to real trading, where losses will not be perceived as easily. If you get used to trading on a demo account, it will be difficult to start forex trading on real trading accounts due to the difference in transaction processing. This can lead to disappointment, since on a demo account everything turns out better than in real trading. And then you may begin to blame the dealer, the Forex broker and its quotes and order execution and the notorious “first market price”.
Talking about a demo account, it is imperative to mention its most significant features:
- It can be opened in just a couple of minutes;
- It does not require starting cash depositing and replenishment in the future;
- It allows you to trade on real quotes;
- It can be opened for any amount.
In addition, there are no restrictions on the number of demo accounts used by you: there can be as many as you like, according to your needs.
Based on all of the above said, it can be confidently stated that a demo account is an excellent training tool for any novice trader, as well as for many professionals. Providing a wide range of opportunities and complete freedom of action, it allows you to gain a lot of trading skills, the benefits of which are almost impossible to overestimate. Thanks to the experience gained while working with the demo account, taking the first steps in real trading will be many times easier, and this is a significant saving of your nerves, time and effort.
Author: Kate Solano, Forex-Ratings.com