How To Find The Best Forex Demo Accounts
The term “Demo Account” refers to a special kind of practice account. Anyone can use these trading accounts to become familiar with an online trading platform and its features in a low-risk environment.
As recently as 2005, most people would simply do “paper trading,” which refers to keeping track of a series of hypothetical trades on paper. Today, “paper trading” generally refers to trading in a kind of digital “practice environment” where you don’t risk real money.
In 2019, most forex brokers offer some kind of free demo account. For the most part, brokers offer these demo accounts intending to provide traders the ability to test if the platform will fulfil their needs. If you are not sure which platform to go with when you are just starting out than you should check out our list of the best trading platforms of 2019.
Forex Demo Account Advantages
If you’re looking for a new broker, signing up for a demo account might be the quickest and most risk-free method for testing if that trading platform has all the features you need. It’s generally recommended to do this before putting any real money into an account with that broker.
Demo accounts can also be used to evaluate trading strategies and test trading robots. By using a demo account, traders are able to see how particular trading strategies would perform based on real-world data without needing to risk real money during the learning process.
Trading platforms provide charting features, indicators, and functions that are invaluable in the trading process. Signing up for a forex demo account can provide you with the valuable experience needed to confidently and quickly use a new trading platform. The more adept you are with the trading platform, the more likely you will trade profitably.
Forex demo account disadvantages
Probably the most significant disadvantage with a forex demo account is that it’s not real money. This removes risk, but it also removes any potential gains. Connected with this, you don’t experience the intense emotional swings of real-life trading. This means demo accounts don’t help you develop a resistance to emotional trading. Emotional trading is trading based on what you “feel” is the right trade. Emotional trading – instead of trading based on a strategy – is one of the leading causes of failure on the market.
Inexperienced traders also tend to be complacent when using a demo account to practice their trading skills. Subconsciously, they know that there is no real risk involved, and so they may take more significant risks then they would do in a real-money environment. This lack of emotional experience with emotional control can cause the research and learning acquired from the demo account to be less than accurate, and therefore, less than reliable in the real world.
Lastly, some demo accounts are completely removed from real market trading data. That means essential real-world factors – such as lag time, slippage, and latency – might be invisible inside of the demo account.
Alternatives To A Demo Account
If a demo account doesn’t seem to fit your needs, you might consider a micro account. Micro accounts are funded with real money and can be used to simulate actual trading. For example, if you were to make it $2000 trade inside of a demo account and that $2000 trade were to increase significantly, you wouldn’t make any money. However, had you been trading inside of a micro account, you might have received some of the profit.
Another benefit of micro accounts is that they provide you with real-market conditions such as surprise news, slippage, and latency. Each of these things can dramatically affect the success (or failure) of a trade.
Trading Psychology And Demo Accounts
There’s a surprising amount of psychology involved in forex trading. It can be mentally and emotionally challenging, requiring that forex traders have complete control over their emotions along with a fact-based strategy for their trading behavior. If you take the demo account seriously, it can be an incredibly useful way for you to improve your mental and emotional fortitude for trading.
Account Size Management And Demo Accounts
No matter what form of trading or investing you are involved in, risk management it’s fundamental to your success. There are many different ways to manage risk and one of them that is related to demo accounts is account size management. Account size management is where you attempt to avoid significant losses in your account by choosing the size of your trades in proportion to the size of your account.
For example, if the trader has $100,000 in his trading account and decides to use 20% trade sizes ($20,000 per trade). If the first trade is lost, the account will lose 20% of its value. If two more losses of 20% happen, the account will be drawn down a total of $60,000. That trader must make a gain of 150% just to break even.
Compare that to a trader who decides to use 4% trade sizes. If this new trader also loses three sequential trades (the same as the first trader), he would’ve only lost $12,000 and could reach breakeven with a 17.6% gain.
Especially in times of significant market volatility and adversity, risk management is the key to staying solvent. Account size management within a demo account is a great way to develop your account size management skills.