Trading on a demo account is done with virtual money, so you can trade without risking your real money. A demo account gives an opportunity to check the trading conditions of your broker, for example, order execution speed, margin, commission, absence of requotes, and slippage.
August 6, 2021, | AtoZ Markets – A demo account is a trading account, which you can use to trade with virtual money. There are many reasons for a new trader to practice on a demo account. And I highly recommend a new trader first to trade on a demo account.
Many new traders wonder, when do I start real trading? The answer entirely depends on trader’s accumulated experience. How can you get this experience? The answer is simple: by trading on a demo account.
As a common way of encouraging traders to use their services, most brokers offer a free demo account to potential or existing clients. Such accounts allow a trader to experience in practice what it is like to trade without putting their real money at risk.
While using a trading demo account has numerous benefits for traders, it is worth mentioning that the emotions a trader gets when trading on a demo account differ from real trading experience.
Many people underestimate trading on a demo account, believing that trading with fake money does not make much sense. However, this is a delusion. A trading demo account is an integral part of the success of any trader.
Trading is always long-term work. Many traders are often extremely enthusiastic and optimistic when they first start trading. However, after a year, most of them fall out of the race and stop trading. Why is this happening? Because most people lose money and decide that trading is not for them.
However, there are simple steps you can take to avoid this situation. And trading on a demo account is the most important step. Demo trading can save you time and money.
While you may not be able to replicate the experience of trading with real money, you can get a number of benefits from demo trading.
Many of us have ever played sports. And athletes spend most of their time in training. For example, footballers spend 80% or more of their playing time on the training field trying to upgrade their skills, which they need to play in real life.
Trading Demo account gives a trader many advantages:
Trading on a demo account is done with virtual money, so you can trade without risking your real money.
A demo account gives an opportunity to check the trading conditions of your broker, for example, order execution speed, margin, commission, absence of requotes, and slippage.
You will be able to test your scripts and Expert Advisors. It is always recommended to test it on a demo account before launching a script or an Expert Advisor on a real account. You do not want your advisor to start opening and closing orders and making a loss. Running on a demo account will help you find errors in the code and eliminate them.
However, there are some differences between a real trading account and a trading demo account:
Demo trading psychology differs from real money trading psychology. You will not feel the same risks, therefore, your trading will be completely different.
It takes time to test your strategy on a demo account, especially if you are trading on higher time frames.
Order execution may differ on a demo account compared to a real account. A demo account has the same settings as a real account in terms of trading conditions, however, it is usually hosted on a different broker’s server.
Opening a demo account
Almost any broker allows potential and existing clients to open a demo account for free.
Demo traders also have access to at least some of the broker’s client services and support staff so that they can better understand how a broker might be organized if they decide to fund their trading account with real money.
Traders wishing to open a demo account can usually go to the website of one or more brokers and follow the instructions there.
When opening a demo account, you may also need to select the amount of virtual money to deposit and enter some personal data to identify yourself.
The virtual trading platform provides you with a hands-on mechanism for trading the financial markets. When you open a foreign exchange account for practice, you receive virtual dollars that you can use to measure your trading performance.
With demo accounts, you can practice trading without losing your real capital. Several brokers provide clients with unlimited virtual funds, allowing you to use a practice trading account without the need to switch to a live account.
Demo trading advantages
Both beginners and experienced traders usually use demo accounts to try out a new broker or trading strategy.
Some of the most common benefits in demo trading include the following:
An opportunity to try trading. Those who are new to trading can use a demo account to see if they are morally and emotionally suited to trade on financial markets. All people are different, and some people may really enjoy trading, while for others, constantly looking at charts and opening trades may be bored.
Trade without risk. Newbies who are still learning to trade often feel much more confident to risk their real money. The demo account allows them to practice without risking their money. This allows them to make common beginner mistakes while they learn without paying for the consequences out of their own pocket.
Practice correct money management techniques. One of the secrets to achieving long-term success in trading on financial markets is to study the well-established principles of money management. A demo account allows a beginner or experienced trader to practice this thoroughly.
Learn to Manage Your Emotions When Trading. One of the hardest aspects of trading for many people is to learn how to manage emotional reactions to winning and losing trades. Properly handling psychological reactions to making and losing money, such as fear, greed, and hope can often distinguish a successful trader.
Test your new trading strategy without risking real funds. Experienced traders and newbies will generally want to test the success of any new trading strategy they come up with before applying it to live trade. This allows them to eliminate any errors that may appear when using it in real conditions.
Try broker’s trading platform. If you are not using the MetaTrader platform, which many brokers support, you will probably want to use a demo account to see if the web client version or trading platform is ok for you.
Check if your broker has useful features and services. Brokers looking to get you to open a live trading account with them often give demo traders access to their special features, such as education and news services, and customer support. This can be a great way to check the quality of the broker’s general services before investing any real money.
Demo trading disadvantages
Some of the most common disadvantages of demo trading include the following:
Demo accounts often have limited funds and expiration dates. Many brokers limit demo account funding to the initial amount and do not allow virtual funds to be withdrawn or deposited into the account. In addition, demo accounts often have a fixed duration.
Actual trading conditions may vary. While demo trading seems very realistic and uses real exchange rate data, real trading can be very different, especially during fast markets when broker requotes and slippages are possible.
Slippage of orders may occur less frequently. Brokers can largely or even completely eliminate order slippage from their system on demo accounts. Thus, if a stop loss is triggered on a demo account, it can be executed at the same price at which it was entered, whereas if on a real account, the stop loss may not be executed at the stated price.
Requotes may be less frequent than in real trading. As with order slippage, some brokers looking to attract new clients through demo trading may reduce or even exclude requotes from their demo accounts. In practice, requotes are a common but generally undesirable reality for real traders.
Order execution time can be faster since trading on a demo account does not actually lead to the execution of real transactions on the market, which could have consequences for profit or loss for a market maker or broker. This may result in faster execution times seen when trading on demo accounts, while the execution times observed for trading on a live account may depend on market conditions.
Spreads can be tighter even in fast markets. Due to the fact that trading on demo accounts does not require real money for a trader or market maker, brokers looking to impress potential clients can set artificially tight spreads for demo traders. In reality, the actually quoted spread can be much wider, especially in fast markets where the exchange rate can fluctuate rapidly.
Some people find the trading experience quite enjoyable, and the thrill of making a trade and taking risks can lead to over-trading. Sometimes it is better for a trader to just sit back and not get used to constantly pulling the trigger. Using a demo account does not involve a real risk of financial loss, except for the possible costs associated with not participating in trades on a real account, which is why some people have a bad habit of over-trading.
Excessive use of leverage can lead to bad consequences in real trading. Some traders seem to like to use the high leverage offered by some demo brokers to take very large positions relative to their virtual account size. While this can generate large virtual profits for them, it can also destroy their account if the market goes against them.
Bad trading habits have no real consequences. While demo trading can be a rewarding way to learn how to avoid trading mistakes, some traders do not seem to learn their lessons as well if the real money losses were not involved. This can lead to the creation of unwanted trading habits that need to be overcome in order for a trader to have long-term success with a live account.
Your emotional reactions may vary. Successful trading usually involves learning how to properly manage your emotional responses. Sometimes this key lesson can only be learned from actual earning or losing real money, as people can psychologically ignore the virtual gains and losses that occur in their demo account.
Using the same account size and risk can vary when trading on a demo account. It makes sense to use roughly the same amount of investment capital and risk parameters which you intend to use when trading real money. If you do otherwise, your expected results may not come true if you start trading a similar strategy with a real account.
You may need to share personal information when using a demo account to try out a new broker, you may not want to share all the personal information they might need when opening an account for various reasons.
Risk and psychological factors
There are also important trading psychology factors and potential risks that need to be taken into account.
If you start trading with your real money and suffer serious losses, you will most likely quit trading. Psychologically, you will feel overwhelmed and devastated. Your common sense and logic will persuade you to quit trading.
The direct and indirect risks that you take when you do not use demo trading often lead to the fact that sooner or later you will stop trading.
This is a common mistake many novice traders make. If you have started trading on a real account and feel that you are not ready yet, this is normal. You can return to demo trading at any time. Don’t fall into the trap of wanting to make a lot of money as fast as possible. You can even wait a year before opening a real account and try to steadily take profits from the market. Your trading psychology plays an important role in your success as a trader.
Why start trading on a real account to lose money and end your first year with poor results? It can take traders years to trade profitably. In addition, not every successful trader manages to make a profit from the market every year.
Do not hurry. Understand your trading psychology, study yourself, your trading preferences, your strengths, and your weaknesses. Constantly work on yourself and improve your trading. If you do all of this on a demo account, I guarantee that you will be much better equipped to become a successful and profitable trader.
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