In today’s digital world, trading in the financial markets is about as accessible as the news or your social media accounts. Online brokers and trading platforms put the world’s markets at your fingertips and anybody can become a trader at the push of a button.
Most brokers, who offer trading platforms like MT4 and MT5, will provide a forex practice account. Commonly referred to as a demo account, they allow you to practice trading without taking any risk in a simulated environment.
Brokers like TIOmarkets offer demo accounts free of charge, where you can practice with up to $50,000 in virtual funds.
Practice trading, on a demo account, has some advantages and benefits. But it also has a few disadvantages and drawback when it becomes time to put your money at risk, whenever you go live.
Let’s explore some of the pros and cons of trading on a demo account.
The pros and cons of trading on a demo account
Pros of Forex Demo Trading
Both beginners and advanced traders use demo accounts to practice trading, in the financial markets.
Some of the most common advantages of trading on a demo account include:
Learn if trading forex is right for you
If you’re new to forex or trading, you’ll generally want to start practicing on a demo account, to get a sense of whether you’re going to like it. Everyone is different, and some people are better suited to the risk, returns and emotions involved with trading in other markets.
Easing yourself in to things with a demo account is a risk-free way to get a sense of whether your trading objectives, style of trading and personality are suited to the task.
Check the brokers trading conditions
When it comes to choosing the right broker for you, some of the most important factors to consider are the trading conditions. A demo account is a great way to check whether you’re comfortable using a platform before investing any money.
Trying out a broker on a demo account not only allows you to check their trading conditions but also helps you to understand their service and how different brokers work.
Make risk-free mistakes on a forex demo account
It’s only natural that every budding trader wants to know if they have a chance at making a profit before putting actual money at risk. A demo account lets you practice in a simulated environment that very closely resembles the real thing.
This means you can make mistakes without suffering the consequences out of them and having to pay out of your own pocket. You’ll get the chance to learn from your mistakes, correct them and make some progress with taking any risk.
Practice risk management in a simulated environment
Trading’s best kept secret is that risk management is the key to success. To enjoy consistent and sustained success as a trader, it’s essential to establish good risk and money management techniques. A demo account will let you apply your knowledge into practice and see how they work (or fail) so you can make improvements.
When you start out as a new trader, you are likely going to ignore or overlook many principles of risk management. In time, you will appreciate and gradually introduce these principles into your trading. Practicing on a demo account will show you how the benefit of doing so accrues in your virtual balance over time.
Test trading strategies risk free
New and experienced traders alike will want to test their trading strategies and ideas on a demo account before trying to implement them with real money. A demo trading account lets you become accustomed to following the rules of the strategy and work out any potential flaws before it costs you money.
Practicing with virtual funds can help you optimize your trading system before using it on your live account.
Learn the trading platform
This is particularly important for new traders. The demo account offers a stress-free method for learning your way around the platform. There are few worse feelings than being in a crucial trade, only to realize you don’t know how to modify or close it.
The demo account lets you orientate yourself around the platform. So you can learn where every tool is and how to execute trades, to minimize the possibility of making mistakes.
Cons of Demo Trading
Although there are considerable advantages to using a demo account, there may be some disadvantages and drawbacks too. You’ll probably only appreciate these and notice once you have made the switch from demo to a live trading account.
But by being aware of some of the cons of trading on a demo account will help you better manage the transition.
Many people are enthusiastic and get all excited about the wonderful opportunity of making money in the markets. Opening and closing trades on a demo account and watching the changes in your virtual balance can encourage you to trade more.
Why not, you have to be in it to win it right? Yes, but not quite. By starting off on a demo account, you might find yourself trading for trading’s sake and then find it hard to break the habit once gone live.
In the real world however, it’s best to follow your strategy and let that dictate your actions in the market. If the rules of your strategy don’t permit you to take any action, then you should refrain from trading.
Differences in execution between demo and live accounts
It is commonly known that trading in a demo account and a real, live account are different. The main difference between the two accounts is that in a demo account, you are trading with an instant execution of your orders. The trade doesn’t leave the platform. In a live account, your trades need to get “filled” with a market execution and get transmitted over a data network.
Although we are splitting hairs with execution speeds here, your trades can only be executed against the available liquidity in the market at the time. This means that you are more likely to experience price slippage on the live account but not on the demo.
Emotions aren’t quite the same on a demo account
Trading without risk on a demo account can enable you to overindulge in your new found passion to a degree but remember, you have nothing to lose. If you’re not able to temper that urge when you go live, it can ultimately lead to real financial loss.
A big part of earning money through trading involves learning how to keep your emotions in check. Greed, fear, the urge to chase price and revenge trading are common and often lead to loss. These emotions and trading behaviours ruin many a traders.
The truth is, you shouldn’t expect to learn how to handle this aspect of trading solely from a demo account. Demo and live trading is just not the same, primarily for this reason. Your emotional response when trading in a demo account might be to shrug off a loss (which incidentally is often the correct approach), but when real money is involved, you may find yourself in a sudden frenzy.
You’ll only truly learn what you’re made of, and how to improve your emotional response when it matters most, when you trade with real money.
Bad habits don’t have consequences on a demo account
You’ve all heard the phrase “practice makes perfect”. But does it really? Does the stage actor learn more in rehearsals or in front of a live audience, when the entire production depends on them? Does the athlete learn more on the training ground or in the arena, when everything is on the line?
If all you do is practice on a demo account, your mistakes don’t cost you a thing and your success doesn’t matter as much. Inevitably, you won’t learn as much about how to make it when your money is involved and when you have something to gain or lose.
Unrealistic expectations when trading on a demo account
You can fund your demo account with however much you like. TIOmarkets gives you up to $50,000 in virtual funds to practice trading with. How likely are you to deposit that amount of money?
The experience of trading on a demo account and your performance on it, is rarely a good representation of what it’s going to be like when you go live. Mainly because you can access a virtually unlimited amount of money to practice trading with, but trading is different with smaller balances.
Consequently, many start trading on a demo account and formulate unrealistic expectations about the profit potential and how long they can hold on to losing trades.
Conclusion about trading on a demo account
Regardless of whether you’re new to trading, have some experience, exploring brokers, or trying to optimize a new strategy, a demo trading account can be a useful tool.
When used correctly, they can be a helpful and provide you with a safe environment to have fun and learn in. While you prepare yourself for the real objective, which is turning the time and effort spent on them into something more tangible.
Try to avoid the cons and drawbacks that have been mentioned above, like developing bad trading habits and creating unrealistic expectations. You are welcome to try trading on a demo account but they rarely prepare you for trading with real money, since you don’t have anything to lose.
Never the less, demo accounts are a good place to start but beyond a certain point, they are likely to hinder your development as a trader. Only trading on a real live account can give you the experience necessary to reach your full trading potential.
TIOmarkets has a free demo account, so you can practice without risk in simulated environment on the MT4 or MT5 trading platforms. Create your demo account, check our trading conditions and learn how to operate the platform.
Alternatively, you can start trading from just 10 cents per pip on a live account to get the full trading experience. The minimum deposit is only $50!
Take the next step and register your demo or live trading account today.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.