How to Approach Demo Account Trading

08 July 2020

The majority of Forex brokers offer two types of accounts to their clients: live and demo. A live account is the one used for the actual trading: making real deposits, opening new positions, and generating payouts (or getting losses). A demo account is characteristically different.

Instead of a trader depositing their hard-earned funds and opening real trades, the demo account allows them to use virtual trading funds in trading. Usually, demo and live accounts are pretty similar in terms of reflecting price trends and swings, offering trading tools and indicators, and delivering an overall realistic experience. The main difference is that with a demo account, traders don’t need to spend their money on trades.

A demo account can be a useful tool to learn the basics of trading Forex, stocks, commodities, and just about any financial market. By using a demo account for Forex trading, beginner traders can understand the ways in which the foreign exchange market works, as well as find out which instruments are most suitable to their needs, and which strategy works best for them.

It is also important to note that even the experienced traders find demo accounts useful. Whenever they want to test out a new trading strategy and find out how different spread levels work for them, a demo account can prove an ideal platform for their needs.

Why is Trading Psychology so important?

Using a demo account for Forex trading

When entering the financial exchange market, whether it’s Forex, stocks, or commodities, or just about any other market, there is one universal aspect that can be noted with many brokers: they offer two types of accounts to their clients - live and demo trading accounts.

The difference between demo and live accounts

A live account is the one that is used for making the actual deposits, opening real trades, and generating payouts/experiencing losses. In short, they’re the ones used for actual trading. However, since there are many financial risks associated with live accounts, and there are plenty of beginners who are just starting out their trading career, the brokers have a demo account up to their sleeve.

Just like a live account, a demo account allows people to choose their preferred trading instrument, determine the size of the position, and start trading on the market, notwithstanding its type. However, instead of making deposits from your own personal wallet, you are using virtual funds provided by the broker. It means you aren’t actually using anyone’s money to trade Forex, stocks, commodities, or other instruments.

Another difference between the two account types is in their set-up processes. On the one hand, there is a live account that usually requires traders to send some form of an identification document to the broker, fill out an application, and make a deposit. On the other hand, a demo account usually alleviates all of those extensive requirements and only asks for the basic details like the name, birth date, email address, etc. And it doesn’t require any size of the deposit.

Who can utilize an FX trading demo account best?

The most obvious group of people that can fully utilize the capabilities of a demo account is the beginners. According to many experienced and successful traders, engaging in live trading and risking your hard-earned money without the actual knowledge and experience is much more dangerous than trading already is. Therefore, it is best they hone and polish their trading skills using an FX demo account and then go on with live trading.

By using a demo account, beginner traders can effectively answer some of the most important questions any trader should ask themselves before entering a financial market, namely:

Which tradable instrument is most suitable for them - it is not the best idea to start trading just about any instrument that you see first. Every instrument has its peculiarities (different volatility levels, trading hours, market density, etc.) that should be observed first and then chosen as the main trading asset

What time is the best to initiate trading - this is especially important for day traders, i.e. those traders that open and close positions within a day. By testing out different timing techniques, traders will have a better understanding of when the asset is most active and volatile and when it is best to initiate a trade

What is the most effective strategy to execute trades - by employing different trading strategies on demo accounts, people can find the best one that generates the largest payout and minimizes the losses. Since strategies aren’t universal and different approaches work for different traders, it is important to test them out in real life and a demo account can provide a perfect platform for that

By thinking about these questions, experimenting them within a demo account, and finding out what works best for their trading needs, beginner traders can significantly increase their trading game. But it’s not to say that only the inexperienced people can utilize the capabilities of a demo account.

Even the veteran traders tend to use this feature offered by their broker in order to test out changes in their trading style before they implement them into their actual trading. For example, they may be transitioning from one financial market to another and want to experiment in the field before starting the real trading.
Demo account for Forex trading

They may also be changing their trading strategy and want to try it out on a virtual financial market beforehand. Either way, both novice and experienced traders can use the varieties of Forex demo accounts to hone their trading skills safely without risking their funds.

What are the deficiencies of a demo account to make trades?

Now, while a demo account is a useful platform for practicing trading and testing out new strategies, some traders point out that it fails to evoke emotional responses in them. That’s mainly because trading is done virtually and people don’t have their funds at stake.

As those traders argue, the fact that they don’t risk their real funds translates into reckless and careless trading; they are not worried about losing their hard-earned money and can allow themselves to make less thought-out decisions. With a live account, however, any careless decision can potentially cost a trader their whole deposit, which, in turn, compels them to think more before taking any step.

For that reason, a Forex trading demo account is rightly considered inferior to a live trading account. However, there are still some ways of alleviating these shortcomings. For example, a trader can have a mindset that the virtual funds they’re using in demo trading are actually their hard-earned budget and compel themselves to be more cautious in trading. While this can be difficult to achieve in real life, it is certainly possible.

Demo accounts in trading - Key takeaways

In any financial market, whether it’s Forex, stocks, or anything else, traders are usually offered two types of trading accounts: live and demo. While a live account is used for the actual trading with real deposits, online trading demo accounts are dedicated to practicing new skills and strategies.

Unlike a live account, a demo account doesn’t require extensive personal details about a trader and is good to go after disclosing basic information. It is also completely free and allows traders to place new positions on a market that reflects real market conditions. This way, people can trade as much as they want without paying anything. Obviously, this also means that there will be no payouts or losses.

Usually, a demo account is most suitable for beginners who want to improve their trading skills in the actual process while not spending their funds on it. By using a demo account, they can find out which financial market is most suitable for them, what is the most effective time to trade, and which strategy works best for their needs. But even the veteran traders tend to use a demo account for transitioning from one market to another or changing the current trading strategy.

Some traders, however, tend not to trade demo account with Forex or other markets. The reason for that is that there is no financial risk when using a demo account, which allows traders to be more reckless and make rash trading decisions. In short, a demo account doesn’t evoke exactly the same emotional response that a live account does.

FAQ

1.How to open demo trading account?

Usually, when brokers offer a Forex demo trading account to their clients, they have far fewer requirements than live accounts. On the one hand, in order to set up a live account, traders usually have to provide some form of identification document, fill out an application form, and make the real deposit to their account.

On the other hand, there’s a demo account that doesn’t require any of that. The majority of brokers require very basic information like name, birth date, email address, etc. It is completely free of charge. Once those details are provided, a demo account is already created and ready to go.

2.Who can use a demo account most effectively?

A demo account provides a platform where people can trade Forex, stocks, and just about any other market virtually, without any deposit requirement. And when it comes to using it, both novice and experienced traders can find it very useful for various reasons.

As an inexperienced trader, you can be making the most of your demo account by experimenting with different trading markets, trading times, and strategies and determining which one works best for you. By practicing various trading techniques on a virtual market, you’ll be able to develop your own trading style.

As for experienced traders, they too can make use of a demo account. Whether they’re trying to transition from one financial market to another or want to experiment with new trading strategies, a demo account can prove quite useful. Therefore, it is applicable to both experienced and novice traders

3.What are the drawbacks of using Forex trading demo accounts?

While using a free Forex demo account can help you gain valuable information and experience about the way this financial market works. However, it's not a clear-cut solution for everyone, and it has certain drawbacks for some traders. For instance, when you get your Forex broker demo account and open a virtual position with it, you're not using your hard-earned funds in the process. And as some traders point it out, not having anything at stake greatly diminishes your learning experience; since there's nothing to lose, you tend to loosen the attention and not be as careful with your positions. Therefore, while using demo account Forex trading might turn into a game, instead of a real-life financial experience for some people.

4. What are the advantages of virtual Forex trading?

Whether you first start out in the foreign exchange market or have already accumulated quite a lot of experience in it, the Forex trading demo account can help you take your trading game to the next level.

If you are a beginner, it can help you discover various ways in which this market functions. With the Forex free demo account, it's easier to open virtual trading positions for just about any currency pair you want, incorporate various trading tools and features into your positions, and see how you'd succeed should you have traded in the real market.

But it's not just beginners who can take advantage of the Forex account demo trading; even as an experienced trader, you might find this type of account really useful. For example, if you're trying to change one currency pair that you've been using to another one, or swap an old trading strategy for the new one, you can use a Forex demo account and safely test out your new trading approaches.