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.
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.