How to Make the Best use of a Demo Account in Forex ?
The point we are going to discuss here is in my opinion very important. The main thing we have to retain is that a demo account will never be a real account… Of course it seems very stupid but in reality, most people don’t make any difference between demo and live and they think their live account we’ll be exactly identical as their demo account….
A forex trading demo account is offered by almost every legitimate forex broker today. The brokers profit by automatically marketing their business to curious traders, while the traders themselves satisfy their curiosity and sometimes make up their mind about whether they should be opening a live account by spending some time trading the demos. Needless to say, the most important question that must be answered about demo trading is the extent to which it is similar to a live trading account. Do we really gain valuable experience about trading by being active in the safe and sanitized environment of the demo account? Let’s take a deeper look at this important question.
Demo trading is risk free
Regardless of how faulty your strategy or approach can be to trading in general, the maximum amount that you can lose or gain in demo trading is zero. Demo trading is a game, but forex trading is a highly risky activity that can have significant consequences for the financial well-being of a reckless trader. Of course, there is also the possibility that a competent trader will get rich trading currencies. In all cases, forex trading is about risk management, and since demo trading has nothing to do with risk, it can never be a reliable testing environment of your potential in the market. Demo trading is not even an approximation of live trading.
Demo accounts are marketing tools
An interesting aspect of demo trading accounts is the large amount of starting capital that is made available to beginners, typically between $50-100,000. This gives a sense of false security, since the trader will probably think, if he’s unable to wipe out that much money in a short time, he can afford to learn the task by trading with real money with a misplaced sense of confidence. That is not bad for the broker, since any capital committed, and any trade initiated is a profit. But it is not good for the trader who must sooner or later come to the realization that the false confidence inspired by demo trading did not have any relationship to reality.
Demo trading can be useful for education, but not for practice.
Demo trading is an excellent tool for understanding how forex software work, how you can develop strategies, and also for testing basic assumptions about the functioning of markets. There is no better way of learning about how to place a stop-loss/take profit order, for example, than doing so while demo trading. But demo trading is not for getting used to risk, or for understanding it. The only way of achieving that goal is trading with real money, by very small sums, probably by making use of a mini account at the same time.
