Forex aficionados go back and forth over the value of demo accounts. There seems to be a love-hate relationship with trading virtually.
There are those who think demo accounts are a waste of time. Do your homework and then get going, they say, as there’s nothing like testing your mettle in a live trading environment.
Others wouldn’t think of taking a new strategy to market without test-driving it on a demo account first. They’d say demo trading is the perfect way to learn: get a feel for forex markets before putting real money on the line.
Are demo Forex accounts really all they’re cracked up to be? The answer isn’t really a binary yes or no.
They can be a valuable tool, but how valuable depends on how you put their capabilities to work. Let me explain.
What are demo accounts all about?
Demo accounts are two things really. First and foremost, they’re a way for currency trading brokers to entice new customers to their platforms. By giving traders a safe space to test drive and experiment, they get a boost to monthly sign-ups.
But they are also invaluable learning environments. Both newbie and experienced traders use demo simulations to learn the mechanics of trading, test new strategies, or simply see what the trading experience is like with that broker.
Demo accounts typically come with educational resources and customer support – all for free. When you register with a broker and open a demo account, you fund it with an amount of virtual money.
You can then start opening trading positions using real market data feeds, and try to make a (pretend) profit.
How does demo trading stack up to the real thing?
Demo and live trading aren’t so different. A demo account using real-time market data can replicate the live trading environment pretty accurately. The steps to open or close a trade are the same, and any bets you make will leave you in loss or gain based on what actually occurs in the market.
Novice traders can use demo accounts to see if forex is really for them. More experienced traders use demo accounts to test new trading strategies before taking them ‘live.’ They also use the demo to get a feel for the limitations and benefits of the system and see if there are any issues that need working out.
Still, there are some key differences between live and simulated trading action that need to be understood – especially if you plan to make the leap to live trading later.
Because demo account trades happen in a virtual environment, the risks are lower. That makes demo accounts starkly different from live accounts funded with real cash.
Brokers might limit your time or restrict the amount of virtual cash you can trade with. It’s not uncommon for demo account conditions to be more optimal than those experienced in real life.
Live trading also brings intense emotions – and learning how to manage those and stay cool in an often volatile environment is vital for FX trading success.
And on a basic technical level, some of the demo forex accounts available in Nigeria are simply better than others. A demo can help you determine if a platform is likely to freeze or drop out in mid-trade.
Demo life doesn’t always reflect reality
Most major brokers play by the rules, and those in regulated jurisdictions have to maintain even higher operational standards. The imperatives of marketing, however, will prompt some to occasionally fine-tune the demo experience to try and attract more customers.
A forex broker trying to win new customers in a given time period might offer spreads in the demo account that are tighter than normal. The dealing spread for a live account could be a lot wider, particularly in volatile periods where exchange rates fluctuate wildly.
A broker might also adjust or even eliminate re-quotes in their demo systems. Re-quotes can be frustrating, but they are a regular feature of forex that every trader needs to come to terms with.
And since demo accounts don’t send real transactions out to the market, virtual trades can happen faster than usual. In a live trading environment where execution times depend on market conditions, one or more re-quotes could be involved, making the transaction less seamless.
Demo accounts have other built-in weaknesses that can make emotion-management more difficult. Because the thrill of the trade can lead to feelings of euphoria, demo accounts can lead to over-trading, a sort of addictive behaviour where traders open more positions when they should stop, or even scale back the ones they’ve already got.
Demo trading can also reward bad habits. Without real money on the line, errors may not register as the normal market punishments don’t really manifest. Demo trading can mask negative trading habits that will all need to be unlearned when live trading begins.
The psychology of simulation
In demo trades your own hard-earned cash isn’t at stake. On the one hand that means you should be able to stay rational and make calm decisions. You might feel disappointment if a virtual trade goes south, but it’s nothing like what you’ll feel if real money goes up in smoke.
For most people, all that changes when you go live. The sense of urgency goes up sharply, and the emotions around your trades become more intense.
That’s probably the best argument of all for starting your trading journey with a demo account. While you’re learning the mechanics of opening and closing positions, or mastering risk management, you can also experience the psychological roadblocks that interfere with decision making. The demo can provide a safe environment to train yourself to remain rational and unemotional.
Still not sure?
There’s also a third option if you aren’t convinced demo accounts are a good time investment: give yourself time to practice on a live account.
Start trading with a small amount and practice with it in much the same way you would with the demo account. It’s an excellent way to test your real emotional responses, and also lets you see exactly what the live trading experience with that broker is like – with realistic spreads and without any artificial optimisations.