In order to become a professional in a certain business, it is necessary to spend a lot of time gaining experience and honing the working technique. And Forex trading in this case is no exception.
Only those traders who devoted their time and effort to theory and practice, can effectively speculate financial assets and earn good money. And where can you learn the basics of trading if not on a demo account? So, let’s talk about the pros and cons of this type of account.
What is a demo account?
The demo account is a virtual platform where everyone can try their hand at the trading process. Simply put, this is a possibility to test strategies, indicators, tools and everything that a trader can use in the process of trading in the foreign exchange market.
As a rule, all beginners start with a demo account, because they don’t need to deposit their account with real money - the trade goes for “virtual money” issued by the broker. Thus, the beginner has at his disposal a certain amount of funds that he can use in trading and unlimited possibilities, because this type of virtual account repeats all the features of working in the real market. Only there are no risks, which means the approach to trading is more restrained, nerves are protected - you can train comfortably.
The main functions of the demo account
We said about what a demo account is. And even managed to touch on the main characteristics of the virtual platform. But it is worthwhile to dwell in more detail on the opportunities that open up for the trader who has chosen a demo account for work.
We’ll make a reservation right away - not only beginners use a demo account in their work. Active users of the virtual platform are professional currency market participants who want to hone their skills in a new strategy or try to work with a new asset. This is exactly what we’ll talk about next.
Demo Account Features:
- Acquaintance with the Forex market. Everyone knows that without training, counting on a positive financial result is stupid. At least when it comes to independent trading in the Forex currency market. Anyway, you can “probe” what Forex trading is only by plunging directly into the trading process. And if, in the case of trading on a real account, a trader will have to pay a certain amount of funds in the form of a starting deposit, then giving preference to a demo account will have to take risks only with virtual funds.
- Testing the trading platform. Yes, access to financial markets for a trader is impossible without special platforms - trading terminals. The most popular among all existing ones are MetaTrader4 and MetaTrader5, developed by Meta Quotes. Many manuals have been written about working with these platforms, but theory is one thing and practice is a completely different one. And in order not to get into trouble when entering the financial market and not to lose money, the best solution is to test the platform on a demo account.
- Development of a trading strategy. It may be necessary for a practicing trader to change a trading technique or improve an existing one. This is a completely normal process, as almost all forex traders are experimenting with strategies, trying to achieve the best results. Counting on instant profit without testing the strategy is quite risky. Most likely, at first, the trader will encounter a number of mistakes when planning the trading process and, as a result, lose profits. Therefore, the best option for improving your own trading strategy will be a demo account, where although funds will be lost, they will be virtual.
- Testing indicators. No working strategy is possible without the use of technical indicators that signal the best points of entry into the market, the reversal of the price of an asset, trading volumes and other features without which trading on the market would be carried out with “eyes closed”. Accordingly, the selection of a suitable indicator should occur through testing. And, of course, a demo account will be the best platform for this.
- Testing new trading assets. Currency exchange trading is inextricably linked with surges and falling asset’s values. When a particular asset loses its position in price and becomes unattractive to traders, there is a need to find new assets for work. Therefore, it is necessary to test new tools, because each of them has its own characteristics in work. On a real account, doing this is financially unprofitable, while a demo account is the optimal platform for working with new tools. And the emergence of new assets, such as, for example, ETFs or cryptocurrencies arouse interest among speculators, and makes them try to trade these tools on a test account type.
Advantages and disadvantages of trading on a demo account
Having opened the topic of what a demo account is, what are its functions and what it gives traders, it's time to go over the advantages and disadvantages of this approach to Forex trading.
Let's start with the benefits:
- Opening a demo account takes only a couple of minutes - there is no need to fill out a complex registration form with the submission of personal data.
- When registering, there are already virtual funds in the account that the trader can dispose of in the process. These funds cannot be replenished at the discretion of the trader, but can be increased by participating in contests from brokers that are often held on these types of accounts.
- The expiration date of a demo account is almost always unlimited. Yes, some brokers impose restrictions on the usage of demo accounts, usually limited to a period of 30 calendar days. After this period, the account should be re-registered. But such "troubles" are extremely rare and it is difficult to stumble upon such a company. As a rule, most brokers allow their clients to work on demo accounts for an unlimited amount of time.
- A demo account is an excellent field for testing trading strategies and new trading instruments, getting to know the Forex market as a whole.
- There is no risk when working on a demo site, because trading is carried out using virtual funds. Accordingly, the barrier of fear of losing money is erased - it is easier for a trader to get involved in work.
The disadvantages of working on the demo are also present:
- The demo account relaxes and the trader must be aware that it is not worth working for virtual funds for a long time - you can get used to it and never dare to switch to real trading.
- Estimation of profit and loss may be inadequate. The thing is that trading is carried out using virtual funds, hence the lack of responsibility for the deposited money. Similarly, in the case of the profit – there are no prices in “candy wrappers”.
- Relaxed trader. And again, the whole point is that trading is using virtual funds, there is no psychological stress, emotions also do not play a role in the trader’s decisions, there is no risk of losing own funds either, and therefore the behavior of the trader may be slightly irresponsible, which will affect trading significantly when the trader finally dares to switch to a real account.
Is it worth to open a demo account?
Well, of course it’s worth it. Think for yourself - what are you risking? That's right, nothing at all! The funds are virtual, while the principle of trading is fully consistent with trading on a live account. Of course, some mistakes are possible. For example, the real type of account may involve working on cents and using a micro lot, while on a virtual account you won’t be indulged in such “charms”.
But in general, the demo type of account will be an excellent springboard for real-time trading in the future. Of course, if you do not forget that trading in real life will be real and that means that you must bear responsibility for profit / loss right now, even trading virtual funds. Then it will be much easier to cross the barrier of uncertainty without unnecessary financial losses.
We remind you that on our rating you can always choose a suitable broker for a number of parameters to work in the foreign exchange market. Our rating of forex brokers contains a wide range of brokerage companies, and you can read reviews about any of them.
Author: Kate Solano, Forex-Ratings.com