It is essential to understand how to use a forex platform before you actually start trading on it. Usually, beginner traders use a demo account to learn how to trade, which guarantees that their real money will not be under any risk. This blog is going to explore the best approach regarding trading with real money on a live account or starting to learn on a demo account.
Before we get started if you want to find out more about Demo accounts vs. live accounts, I’ve prepared a video that you can watch on our ForexSignals TV YouTube channel.
What is a demo account?
A demo account replicates real trading environment with real-life prices, indicators and all the available tools that a live account has, but only you’re not risking your hard-earned money. It’s fake money, which means you can’t withdraw a penny if you have a winning streak, but equally, you can’t lose your cash either.
Demo Trading Weak Points
No Real Consequences
Many brokers offer a demo account as a free incentive to attract you. They’ll give you between $10k and $100,000 of virtual money and even insane amounts of leverage to basically get the excitement juices going.
You can sit in front of the screens and make tens of thousands of dollars in just a few minutes without the worries of losing because you could just start all over again. Unfortunately, it’s not as simple as that.
A demo account provides a risk-free trading experience. Without real consequences, traders could become reckless which will affect their trading mindset in the wrong way.
When you’re trading with a demo account you don’t experience the same emotions. It’s often said that one of the biggest challenges when trading it is the psychology aspect.
The two biggest emotions that traders experiences are fear and greed. But these are common emotions in Forex, prevalent when you have real money on the line. You can’t experience them trading in a demo environment. It’ll not provide the same emotional commitment and it’ll not allow you to practice emotional control.
There is a flawed concept about trading on a live account but with small amounts of money which it is supposed to be more like the real world. Wrong! If you’re not worried about losing these small amounts of money it’s going to have the same effect as trading a demo account. It won’t be realistic and your emotions won’t be the same.
Chances are, you’ll end up blowing multiple small accounts until you realize that trading is not for you.
Does Demo Trading Have A Purpose?
Understanding The Trading Platform
The first advantage is to get familiar with all the features of your trading platform. As a beginner in trading, you should try every button and test all the features of your platform.
The most common trading platform in the Forex market is called MetaTrader 4. Some of the features of MT4 are forex quotes/prices, charts, technical analysis tools, news feeds and functionality for buying and selling currencies.
Besides, if you’re using an Expert Advisor, it’s important to analyze how it performs in terms of profitability in a demo environment. At the same time, using a demo account will also test the EA for bugs.
Testing Your Money Management
Another huge advantage is the chance to actually test a strategy or a trading idea. And this is possible with real forward-looking data, which is so much powerful than the back-testing data.
All strategies will have their losing and winning streaks and the most effective way to profit is to use reliable money management with correct position sizing.
So the purpose of a demo account is to analyze the data and to build up healthy trading habits, instead of just playing to see how much money you could make.
I think all traders should start with demo-trading, as long as they keep in mind that a “successful demo trader” doesn’t necessarily make you a “successful real money trader“.
Trading in a demo account gives a valuable opportunity to newbies who would otherwise have to learn how to trade real money and risk losing it.
Good education, along with a clear and responsible approach to money management, should ensure that you build a stable base from the beginning which will help in your trading journey.
As always if you liked this blog, leave a comment below. Until next time happy trading and good luck! I hope to see you in the Trading Room.