Demo Trading Accounts 101
A demo account is an online trading account used to practice trade strategies and maneuvers, all without risking real money. In the past, this type of practice was carried out on paper, creating a “paper trail” of hypothetical, simulated trades. Thus explaining the term “paper trading,” which refers to practice trading that takes place in an environment with no real money.
Online trading has skyrocketed in popularity, which means that “paper trading” now takes place online as well. Paper trading involves opening a free demo or virtual account, which you will use to simulate trades and manage virtual funds. Most brokers, if they are reputable, offer traders a demo account for free. Whether or not a broker offers such an account is a good litmus test for seeing if their platform suits your trade needs.
Trading with a demo account is often the entry point for traders seeking to trade in the forex market. Demo account trading is similar to flight simulation for pilots; it’s a first step in the process of becoming a pilot.
Advantages of Demo Trading Accounts
The process of signing up for a demo account is a way to test, quickly and without risk, the broker’s trading platform to see if it meets your requirements. It’s important to test your broker and evaluate them before opening an account in which you risk real money. With a demo account, traders who have never used a trading platform and risked real money before will have a good base to kickstart their career.
Demo trading accounts allows the trader to get an introduction into the practical environment of real money trading without risking the loss of real currency. A demo account is useful for developing, testing, and optimising trading strategies and orders. A trader can evaluate his or her performance on a demo account, improving their own maneuvers or asking expert advisors for assistance. Eventually, this practice will pay off when trading with a real money account.
Trading isn’t just about placing orders and collecting profits. It starts with getting to know the trading platform and ecosystem. To get the most out of your chosen trading platform, you need to study and use it. Be sure to carefully learn all of the features, shortcut keys, and functions used in the process and familiarize yourself with indicators, charts, and other analytical tools.
A demo platform is a great way to get accustomed to a trading platform without risking the loss of real money as you learn basic features and strategies.
Disadvantages of Demo Trading Accounts
Although a demo account is a good option, there are some disadvantages of which traders should be aware. One of these drawbacks is that the demo account isn’t the real deal. The money is fake, the conditions are also fake, and the entire environment is detached from the reality of trading, so you don’t experience the emotional roller coaster or adrenaline surges you would if trading with real money. Because of this simulation drawback, traders may use a micro-account, which is a small trading account that has minimal risk, yet still lets them experience a real trading environment.
Also, there is a problem with complacency when you use a demo account. When traders worked for the money they earned and are putting it at stake, they are not complacent because they have more on the line. When using a demo account, the money isn’t real, so traders may end up taking bigger gambles and risks than they would in a real-money environment. This can skew their results.
Another drawback with demo accounts it that several of real-money trading elements are not present. Traders aren’t there to see the impact of factors like slippage, or other occurrences that, in real life would affect their strategy. Demo trading accounts, therefore, may not be a 100%-accurate reflection of a broker’s platform, where they experience latency, lag time, and other events that differ from a practice run.
Alternatives to a Demo Account
These major criticisms of demo trading accounts can be avoided through opening a micro-account. A mirco-account is funded with real money, and then can be used to simulate real trading. This micro-account has a smaller deposit size, which lowers the risk associated with it and is a good, inexpensive way to get introduced into real money trading.
A micro-account gives you a better grip on trading realities. For example, if you wanted to start full-scale trading with $2,000, you wouldn’t want to open a demo account that has a default amount of $100,000 (in fake money). This huge gap between intended funding and practice funding would make it difficult to practice money management.
However, if you opened a $100 micro-account and used micro-lots to trade, you would be trading with real market conditions and experiencing the adrenaline and thrill that is real money trading. You could see how factors such as retracements, slippage, surprise news, and more actually impacted your psyche and outcomes.
Also, such a miniature account could easily be opened with money that you could afford to lose. The cost of opening a micro-account can be viewed as part of your learning costs or an investment in your education.
Psychology of Trading
There’s no denying that trading is a mentally challenging career. The reasons behind that primarily have to do with the psychology of trading itself.
When you make a winning trade, you feel exhilarated and ecstatic. But, when you get on a losing streak, which happens, you can feel confused and even irrational. Irrational behaviour by a trader leads to common sense being thrown out, causing bad decisions and more losing trades.
Difficult though it may seem, a trader must control their emotions, even in downswings, and develop a resilient mental barrier when it comes to trading. This mental toughness is reinforced by risk management techniques. When losses occur under these systems, they occur only to the degree at which they can be recovered.
The psychology of trading is about managing these highs and lows. Numerous books are available to traders to help them attain a positive mindset.
Learn About Account Size Management
“Risk management” refers to account size management. Account size management means that you know how much you can trade and lose without enduring a crippling loss to your trading account, otherwise known as “blowing out” your account.
For example, suppose that a trader has $1,000 in his account. He decides to use a trade size that will take $200 as margin for a trade. If he loses the trade, the $200 is gone and his account is down 20%. Two more losses of equivalent magnitude reduce the account by another 40%. The trader now has to make a gain of 150% to get the account back to its starting $1,000.
To contrast, take a trader who uses a trade size that commits just $50. The trader loses three trades of equal size, similar to the first trader. But this second trader has lost only $150 and needs only to make a 17.6% profit in order to bounce back to the starting level.
So, 150% versus 17.6% is a big difference. The first trader took a lot of risk to try to make a huge gain, while the second realized that staying afloat in the market is just as important as making a profit. Account size management is the key to surviving market adversity.
A demo account can help traders understand this importance of account size management through the implementation of various trade limits. With a demo, traders can also experience the effects of these limits.
The Final Word on Demo Trading Accounts
In conclusion, demo accounts come with both benefits and drawbacks, but the most important thing to note is the ability to practice that comes with a demo account. A micro-account is also a suitable option. However, if you want to practice account size management and other such risk management tools, a demo account allows you to do that with real money. A micro-account allows to experience a real-world market environment. Either way, it comes down to the fact that practice makes perfect (or close to it).
How to Choose a Demo Trading Account
Before deciding on your trading platform, you will want to try out a few demo trading accounts first. It is the perfect opportunity to learn the ins and outs of the platform without losing any real capital. Below we have listed a few suggestions to help you choose the best broker and trading platform for you:
Some demo trading accounts offer you a specific amount of capital to use while you are learning how to trade. You will want to look at the different capital options offered. Having a significant amount of capital will make small losses easier the recuperate. A small amount of capital will make it harder to recover.
Keep in mind; different demo trading accounts have different time limits. While some demo platforms have a time limit of a week or two, others are unlimited. For beginners, you will, of course, need more time to learn the ins and outs of the fx trading platform, so you will then want to find a demo trading account that offers no time limitations.
Remember, every country has their own rules and regulations when it comes to online trading. Due to the possible safety concerns, make sure that your accounts will be properly regulated and your information secured. For example, the regulatory body in the UK is the Financial Conduct Authority (FCA). The Regulatory Body controls and protects the integrity of the traders, market, and investors in addition to the brokers, and to help members maintain their regulatory responsibilities.
Because trading happens 24 hours a day, you will want to make sure customer service is there when you need it. You may find it more comfortable to speak via chat or telephone rather than awaiting an email reply, which can take time. It could be worth your while to check out the customer support before signing up, and many brokers have a local UK phone number. Find out the wait times and see how the representatives can handle your questions regarding the leverage, spreads and trading volume.
When selecting a broker, many traders just concentrate on stocks. However, you should keep in mind there are many other types of investment alternatives offered. Including Forex (FX), Cryptocurrencies, ETFs, CFDs, futures, options as well as precious metals, to just name a few.
For more information on selecting the right trading platform for you, please see our tutorial: What To Look For When Choosing A Trading Platform