Within this guide, we are going to take through the importance of forex demo account trading, and why it should be a key part of your trading plan, both as a forex beginner, and experienced trader.
When it comes to forex trading, there are advantages and disadvantages to both forex demo accounts and forex live accounts. It’s important to understand the difference between them before making a decision on which one to use.
If you’re new to forex trading, then a forex demo account is a great way to get started, and as long as you understand that there will be some subtle changes in the real trading environment then it is still hugely advantageous.
Why Use Forex Demo Accounts – Pros & Cons of paper trading
You will find that there are many benefits to trading on a forex demo account, and many different use cases.
If you are considering a new forex broker, or trading platform such as MT4 out for size, and are unfamiliar with the inner workings of the systems, this again can be a very useful case for forex demo trading, without the real account risk.
The same use case as above can be said for trading new instruments, or making changes to your usual forex pairs. When you are so tuned in to one particular market, and your strategy is perfected (as close as you can get to it), it can seem as though this particular trading plan can work with any instrument, or forex pair, but rarely is that the case. Whilst there will be large swathes of the trading strategy that will work universally, the key points, resistance levels, support lines, and market news influences will need to be adjusted for the change.
When you are at this point in your journey, you will likely want to run the rule over your plan again with a forex demo account, rather than with your live account. You can also choose to backtest your new strategy in the same trading environment to ensure that your data set, and plan is as accurate as it can be before you move outside of the forex demo trading environment.
Some traders use forex demo trading as a way of playing the market, without any real intention of moving their account over to live status. This can be for a number of reasons; some people find the emotional aspects of trading on a live account too much to handle, and prefer the more sedate pace of forex demo trading. There are some forex brokers out there on the market these days that actually offer demo account trading forex competitions, with real money prizes for the best performers.
Advantages To Demo Forex Trading Accounts
A forex demo account is a simulated trading environment where traders can test out their forex trading strategies using virtual currency. This is a great way for new traders to get started, as it allows you to practice without putting any real money at risk. Demo accounts also allow experienced traders to try out new forex strategies and markets before committing with real money.
First, it allows you to test out your forex trading strategies without risking any real money. This is important because it allows you to see if your strategies are actually working before you risk any of your own money, and removes the emotional aspect of trading from the equation.
Another benefit of forex demo account trading is that it allows you to get a feel for understanding how the forex market works. This is important because the forex market can be very different from other instruments, such as stocks, or ETFs, and it is important to understand how it works before you start trading with real money.
Understanding the nuances of forex trading on a demo account can give you a huge amount of confidence when you move into trading in a real environment, and help you avoid making any rash decisions.
Potential Disadvantages To Demo Account Trading
The main disadvantage of forex demo accounts is that they don’t give traders a true sense of the real forex market. This is because demo accounts use virtual currency and are at times, not subject to the same market conditions as real currency. As such, demo account trading can sometimes be misleading and lead to unrealistic expectations.
A forex live account is a real-time trading environment where you are interacting with the live rate, and trading platform. This type of account gives traders a true sense of the forex market, as you are dealing with real money, subject to real market conditions, and your own psychology also play a part in the result.
There is clearly no risk in a forex demo trading environment vs that of a live account, but without that feeling of risk, it can also remove some of the human element of trading. This can also be achieved with automated trading platforms, or robo advisors, of which we have put together some information separately about both.
Without having the emotional element to your trading, because there is no real money on the line, your behaviour and decision making may be different from what you would otherwise find. If the end result is not exactly as you would find on a live account, then the process of testing your trading strategy and decision making cannot be fully replicated on demo without those emotions.
You may also find whilst using a demo trading account, that your position size may be out of sync with what you would otherwise trade with on a real account, and this can cause you to become unrealistic in your live account expectations also. This is something that you can manage, if you explicitly conduct your forex demo trading account position sizing in line with your typical trade size, and thus improve the realism.
Differences Between Forex Demo Accounts & Live Trading Accounts
Depending on the forex demo account you are using, there are also some that will differ on pricing with their live account counterparts. This is in part due to the fact that the live pricing that is pulled in to the real trading accounts, and the order flow, is not always replicated exactly on the demo trading account environment.
You can still learn how to trade the markets, and spot technical patterns, and charts in a demo environment, but you should not assume (unless you have checked for sure) that the pricing and functionality will always be exactly the same.
A forex demo account will not have any slippage, or requotes. This is a simulation, so the forex broker wants you to have the best trading experience to encourage you to trade with them for real. Slippage and requotes are normal in forex trading and part of the game when trading with a live account. When you are in a live environment, slippage and requotes can occur, as you are interacting directly with the live price, and not the simulated interaction of what should happen in an ideal scenario (where you get the price you want).
During periods of extreme volatility, you may also be seeing different spreads on a forex demo account than you will on a live trading account. This is because forex brokers will often widen their spreads during these times to protect themselves from the increased market volatility. So, while you may see a tight spread on your forex demo account during normal trading conditions, that spread could widen significantly during periods of high market volatility.
Whatever the reasons you might have for forex demo account trading, the truth is that from time time, everyone can make use of a little demo trading, and having access to no limit demo environments can be useful tools to have at your disposal.
How To Get Started With Forex Demo Account Trading
Forex demo account trading is a great way to get started in the forex market. By using a demo account to trade forex, you are able to trade without risk. This allows you to learn the ropes and get a feel for how the market works before you commit to investing any of your own money.
There are many different forex demo accounts available, so it’s important to find one that suits your needs. Some brokers offer unlimited free demo accounts, while others will only approve this for a matter of weeks, or a single month.
One of the most important things to look for in a forex demo account is the ability to trade in a variety of currencies, and that these align with the forex pairs that you intend to trade. This will allow you to get a feel for how different currencies move in the market. You should also look for a demo account that offers a variety of tools and resources to help you learn more about forex trading whilst you use the platform.
When you’re ready to start trading with real money, be sure to choose a reputable forex broker. A good broker will offer you a variety of resources to help you trade successfully, and even customer service support in case you have any questions or concerns.
If you want to get an understanding of some of the best forex demo accounts on the market, we have put together a guide to take you through just that. We are always mentioning risk management here; and paper trading, or demo trading is one of the best ways to keep your initial risk to zero. Once you are both confident in your plan, and comfortable with your broker and trading platform, you can begin to execute on a live account (but still making use of best practice risk management!).